Chapter 10, Problem 10.6AP

Record equity transactions and prepare the stockholders’ equity section (LO10–2, 10–3, 10–4, 10–5, 10–7)

Major League Apparel has two classes of stock authorized: 6%, $10 par preferred, and $1 par value common. The following transactions affect stockholders’ equity during 2018, its first war of operations:

January 2	Issue 110,000 shares of common stock for $70 per share.
February 14	Issue 60,000 shares of preferred stock for $12 per share.
May 8	Repurchase 11,000 shares of its own common stock for $60 per share.
May 31	Reissue 5,500 shares of treasury stock for $65 per share.
December 1	Declare a cash dividend on its common stock of $0.25 per share and a $36,000 (6% of par value) cash dividend on its preferred stock payable to all stockholders of record on December 15. The dividend is payable on December 30. (Hint: Dividends are not paid on treasury stock.)
December 30	Pay the cash dividends declared on December 1.

Required:

  1.    Record each of these transactions.

  2.    Prepare the stockholders’ equity section of the balance sheet as of December 31, 2018. Net income for the war was $490,000.

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 ($)	Credit($)
2018
January 2	Cash $\left(110,000\times \$70\right)$	7,700,000
	Common stock $\left(110,000\times \$1\right)$		110,000
	Additional paid in capital (difference)		7,590,000
	(To record issuance of 110,000 shares of common stock for $70 per share)
February 14	Cash $\left(60,000\times \$12\right)$	720,000
	Preferred stock $\left(60,000\times \$10\right)$		600,000
	Additional paid in capital (difference)		120,000
	(To record issuance of 60,000 shares of preferred stock for $70 per share)
May 8	Treasury stock $\left(11,000\times \$60\right)$	660,000
	Cash		660,000
	(To record the purchase of 11,000 shares of treasury stock)
May 31	Cash $\left(5,500\times \$65\right)$	357,500
	Treasury stock $\left(5,500\times \$60\right)$		330,000
	Additional paid in capital(difference)		27,500
	(To record the reissue of treasury stock above the cost)
December 1	Dividends $\left(104,500\left(1\right)\times \$0.25\right)+\$36,000$	62,125
	Dividends Payable		62,125
	(To record the declaration of cash dividend)
December 31	Dividends Payable	62,125
	Cash		62,125
	(To record the payment of cash dividend)

Table (1)

Working note:

Compute the number of common share outstanding as of December 1:

Details	Number of shares
Common shares issued	110,000
Less: Number of common shares repurchased	-11,000
Add: Number of shares of treasury stock reissued	5,500
Number of shares outstanding as of December 1	104,500(1)

Table (2)

To determine

To prepare: The stockholders’ equity section of the balance sheet as of December 31, 2018.

Explanation of Solution

Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.

Prepare the stockholders’ equity section of the balance sheet as of December 31, 2018 as follows:

ML Apparel
Balance Sheet (Stockholders’ Equity Section)
Paid-in Capital	Amount ($)	Amount ($)
Paid in capital:
Preferred stock, $10 par value, 60,000 shares issued	600,000
Common stock, $1 par value, 110,000 shares issued	110,000
Additional paid-in capital:
Paid-in capital – excess over par value, common stock	7,590,000
Paid-in capital – excess over par value, preferred stock	120,000
Paid-in capital – excess over par value, Treasury stock	27,500
Total paid-in capital		8,447,500
Retained earnings		427,875(2)
Treasury stock, 5,500 shares		(330,000) (3)
Total stockholders’ equity		8,545,375

Working note:

Compute the amount of retained earnings as follows:

$\begin{array}{c}\text{Retained earnings }=\text{Net income}-\text{Dividend paid}\\ =\$490,000-\$62,125\\ =\$427,875\end{array}$ (2)

Compute the value of treasury stock held by ML Apparel as of December 31 as follows:

$\begin{array}{c}\begin{array}{l}\text{Value of treasury stock}\\ \text{held by ML Apparel}\end{array}\}=\left[\begin{array}{l}\text{Number of treasury stock held as of}\\ \text{December 31}\times \text{Purchase price of treasury stock}\end{array}\right]\\ =\left[\begin{array}{l}\left(\begin{array}{l}\text{Number of treasury stock purchased on May 8}-\\ \text{Number of treasury stock issued on May 31}-\end{array}\right)\\ \times \text{Purchase price of treasury stock}\end{array}\right]\\ =\left[\left(11,000\text{ shares}-5,500\text{ shares}\right)\times \$60\text{ per share}\right]\\ =\$330,000\end{array}$ (3)