Record equity transactions and prepare the stockholders’ equity section (LO10–2, 10–3, 10–4, 10–5, 10–7)
National League Gear has two classes of stock authorized: 4%, $20 par preferred, and $5 par value common. The following transactions affect stockholders’ equity during 2018, National League’s first war of operations:
February 2 | Issue 1.5 million shares of common stock for $35 per share. |
February 4 | Issue 600,000 shares of |
June 15 | Repurchase 150,000 shares of its own common stock for $30 per share. |
August 15 | Reissue 112,500 shares of |
November 1 | Declare a cash dividend on its common stock of $1.50 per share and a $480,000 (4% of par value) cash dividend on its preferred stock payable to all stockholders of record on November 15. (Hint: Dividends are not paid on treasury stock.) |
November 30 | Pay the dividends declared on November 1. |
Required:
1. Record each of these transactions.
2. Prepare the stockholders’ equity section of the
1.
To record: The each transaction.
Explanation of Solution
Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.
Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.
Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.
Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.
Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.
Prepare the journal entry to record each of the transactions as follows:
Date | Account Title and Explanation | Debit ($) | Credit($) |
2018 | |||
February 2 | Cash
| 52,500,000 | |
Common stock
| 7,500,000 | ||
Additional paid in capital (difference) | 45,000,000 | ||
(To record issuance of 1.5 million shares of common stock for $35 per share) | |||
February 4 | Cash
| 13,800,000 | |
Preferred stock
| 12,000,000 | ||
Additional paid in capital (difference) | 1,800,000 | ||
(To record issuance of 600,000 shares of preferred stock for $23 per share) | |||
June 15 | Treasury stock
| 4,500,000 | |
Cash | 4,500,000 | ||
(To record the purchase of 150,000 shares of treasury stock) | |||
August 15 | Cash
| 5,062,500 | |
Treasury stock
| 3,375,000 | ||
Additional paid in capital(difference) | 1,687,500 | ||
(To record the reissue of treasury stock above the cost) | |||
November 1 | Dividends
| 2,673,750 | |
Dividends Payable | 2,673,750 | ||
(To record the declaration of cash dividend) | |||
November 30 | Dividends Payable | 2,673,750 | |
Cash | 2,673,750 | ||
(To record the payment of cash dividend) |
Table (1)
Working note:
Compute the number of common share outstanding as of November 1:
Details | Number of shares |
Common shares issued | 1,500,000 |
Less: Number of common shares repurchased | -150,000 |
Add: Number of shares of treasury stock reissued | 112,500 |
Number of shares outstanding as of November 1 | 1,462,500(1) |
Table (2)
2.
To prepare: The stockholders’ equity section of the balance sheet as of December 31, 2018.
Explanation of Solution
Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.
Prepare the stockholders’ equity section of the balance sheet as of November 30, 2018 as follows:
NL Gear | ||
Balance sheet (Stockholders’ Equity Section) | ||
Paid-in Capital | Amount ($) | Amount ($) |
Preferred stock, $20 par value, 600,000 shares issued | 12,000,000 | |
Common stock, $5 par value, 1,500,000 shares issued | 7,500,000 | |
Additional paid-in capital: | ||
Paid-in capital – excess over par value, common stock | 45,000,000 | |
Paid-in capital – excess over par value, preferred stock | 1,800,000 | |
Paid-in capital – excess over par value, Treasury stock | 1,687,500 | |
Total paid-in capital | 67,987,500 | |
Retained earnings | 2,226,250(2) | |
Less: Treasury stock, 37,500 shares | (1,125,000) (3) | |
Total stockholders’ equity | 69,088,750 |
Working note:
Compute the amount of retained earnings as follows:
Compute the value of treasury stock held by NL Gear as of November 30 as follows:
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