Chapter 10, Problem 10.2AP

1.

To determine

To record: The each transaction.

Explanation of Solution

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

Prepare the journal entry to record each of the transactions as follows:

Date	Account Title and Explanation	Debit ($)	Credit($)
2015
March 1	Cash $\left(1,100\times \$42\right)$	46,200
	Common stock $\left(1,100\times \$0.01\right)$		11
	Additional paid in capital (difference)		46,189
	(To record issuance of 1,100 shares of common stock for $42 per share)
May 15	Treasury stock $\left(400\times \$35\right)$	14,000
	Cash		14,000
	(To record the purchase of 400 shares of treasury stock)
July 10	Cash $\left(200\times \$40\right)$	8,000
	Treasury stock $\left(200\times \$35\right)$		7,000
	Additional paid in capital(difference)		1,000
	(To record the reissue of treasury stock above the cost)
October 15	Cash $\left(200\times \$45\right)$	9,000
	Preferred stock $\left(200\times \$1\right)$		200
	Additional paid in capital (difference)		8,800
	(To record issuance of 200 shares of preferred stock for $45 per share)
December 1	Dividends $\left(5,400\left(1\right)\times \$0.5\right)$	2,700
	Dividends Payable		2,700
	(To record the declaration of cash dividend)
December 31	Dividends Payable	2,700
	Cash		2,700
	(To record the payment of cash dividend)

Table (1)

Working note:

Compute the number of share outstanding as of December 1:

Details	Number of shares	Number of shares
Common shares	4,000
Add: Addition common stock issued	1,100
Total number of common stock		5,100
Preferred stock	300
Add: Addition preferred stock issued	200
Total number of preferred stock		500
Total number of stockholders’		5,600
Less: Treasury stock held $\left(400-200\right)$		200
Number of shares outstanding as of December 1		5,400(1)

Table (2)

2.

To determine

To indicate: The effect of each transaction on the total assets, total liabilities and total stockholders’ equity.

Answer to Problem 10.2AP

Effect of each transaction on the total assets, total liabilities and total stockholders’ equity is as follows:

Transaction	Total assets	Total liabilities	Total stockholders’ equity
Issue common stock	+	NE	+
Purchase treasury stock	−	NE	−
Reissue treasury stock	+	NE	+
Issue preferred stock	+	NE	+
Declare cash dividend	NE	+	−
Pay cash dividend	−	−	NE

Table (3)

Explanation of Solution

Explanation:

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

The following are the effect of each transaction on the total assets, total liabilities and total stockholders’ equity:

• Issue of common stock increases cash and common stock, since cash is an asset account and common stock is a stockholders’ equity account, this transaction increases both asset and stockholders’ equity account.
• Purchase of treasury stock decreases the cash since cash is paid to the shareholders to repurchase the shares which are already issued. When shares are repurchased it would be recorded as treasury stock. Treasury stock is a contra stockholders’ equity account. Hence, an increase in treasury stock decreases the stockholders’ equity account.
• Reissue of treasury stock increases the cash since cash is received from the shareholders from the reissuance of stocks. When shares are reissued it would decreases the treasury stock. Treasury stock is a contra stockholders’ equity account. Hence, a decrease in treasury stock increases the stockholders’ equity account.
• Issue of preferred stock increases cash and preferred stock, since cash is an asset account and preferred stock is a stockholders’ equity account, it increases both asset and stockholders’ equity account.
• Declaration of cash dividend increases dividend and dividend payable. Dividend is a contra stockholder equity account, since dividend is paid out of retained earnings. Thus, an increase in dividend decreases the stockholder equity account. Dividend payable is a liability, which is increased at the time of dividend declaration.
• Payment of cash dividend decreases the dividend payable account and cash account. Dividend payable is a liability, which will decrease when its liability of paying cash dividend is decreasing. Hence, a decrease in dividend payable decreases the liability. Cash is an asset account; hence a decrease in cash account decreases the asset account.