Chapter 10, Problem 1AP

1.

To determine

Record the given transactions.

Answer to Problem 1AP

Record the given transactions:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 5, 2022	Cash $\left(100,000\text{shares}\times \$10\right)$		1,000,000
	Common stock $\left(100,000\text{shares}\times \$1\right)$			100,000
	Additional paid-in-capital (balance)			900,000
	(To record the issue of common stock)
November 16, 2022	Treasury stock $\left(10,000\text{shares}\times \$15\right)$		150,000
	Cash			150,000
	(To record the purchase of treasury stock)
November  24, 2022	Cash $\left(4,000\text{shares}\times \$16\right)$		64,000
	Treasury stock $\left(4,000\text{shares}\times \$15\right)$			60,000
	Additional paid in capital $\left(4,000\text{shares}\times \$1\right)$			4,000
	(To record the sale of treasury stock above cost)
December  1, 2022	Dividends (given)		11,400
	Dividend payable			11,400
	(To record the declaration of cash dividend)
December  20, 2022	Dividend payable		11,400
	Cash			11,400
	(To record the payment of cash dividend)
December  31, 2022	Building		800,000
	Cash			800,000
	(To record the payment for building)

Table (1)

Explanation of Solution

Common stock: Common stock is the cash raised by the company by issuing common or ordinary shares to the stockholders. This is an investment for the shareholders for which they receive the dividends from the issuing company, and have voting rights.

Paid-in capital in excess of par value: This is the total of stock capital contributed by investors in excess of par value, and so, sometimes referred to as paid-in capital in excess of par value. It includes preferred stock capital issued in excess of par value, common stock capital issued in excess of par value, and capital issued by the way of sale of treasury stock.

Treasury stock: The shares which were reacquired or bought back by the company, but not formally retired from the corporation stock, are called as treasury stock. The re-acquisition of issued shares decreases the number of outstanding shares.

Explanation for the above journal entries:

Issue of common stock:

• Cash (asset account) is increased. Thus, it is debited.
• Common stock (component of equity) is increased. Thus, it is credited.
• Additional paid-in-capital (component of equity) is increased. Thus, it is credited.

Purchase of treasury stock:

• Treasury stock is a contra equity account. It is increased. Thus, it is debited.
• Cash (asset account) is decreased. Thus, it is credited.

Sale of treasury stock above cash:

• Cash (asset account) is increased. Thus, it is debited.
• Treasury stock is a contra equity account. It is decreased. Thus, it is credited.
• Additional paid-in-capital (component of equity) is increased. Thus, it is credited.

Record the declaration of cash dividend:

• Dividend (decreases the retained earnings) is a legal obligation. It is increased. Thus, it is debited.
• Dividend payable (liability account) is increased. Thus, it is credited.

Record the payment of cash dividend:

• Dividend payable (liability account) is decreased. Thus, it is debited.
• Cash (asset account) is decreased. Thus, it is credited.

Record the payment for building:

• Building (asset account) is increased. Thus, it is debited.
• Cash (asset account) is decreased. Thus, it is credited.

2.

To determine

Prepare the stockholders’ equity section of the balance sheet for Company GA as on December 31, 2022.

Explanation of Solution

Balance Sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Stockholders’ Equity: Stockholders Equity refers to the right of the owner to possess over the resources of the business. Common stock and the retained earnings are the components of the Stockholders Equity.

Prepare the stockholders’ equity section of the balance sheet as on December 31, 2022:

Company GA
Balance Sheet (partial)
As on December 31, 2022
Stockholders’ equity and liabilities	Amount ($)
Stockholders’ equity:
Common stock, $1 par value	$120,000
Additional paid-in capital	904,000
Total paid-in capital	1,024,000
Retained earnings	57,885
Treasury stock, 6,000 shares	(90,000)
Total stockholders’ equity	$991,885

Table (2)

Note: Refer the table 3 for the amounts given in the statement.

Working note:

Compute the ending balances of the stockholders’ equity items:

Stockholders’ Equity:
Common Stock, $1 par value - beginning balance	20,000
Common Stock, $1 par value – issued during the year	100,000
Total common stock	120,000
Additional paid in capital - Common stock	900,000
Additional Paid-In Capital -Treasury Stock	4,000
Total Paid-In Capital	904,000
Retained Earnings- beginning balance	33,450
Add: Net Income	35,835
Less: Dividends paid	(11,400)
Total Retained Earnings	57,885
Treasury Stock (6,000 shares) at cost ($15)	(90,000)

Table (3)

Conclusion

Therefore, the total stockholder’s equity as on December 31, 2022 is $991,885.