Chapter 10, Problem 2PA

1.

To determine

Record the given transactions.

Answer to Problem 2PA

Record the given transactions:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 1, 2021	Cash $\left(1,100\text{shares}\times \$42\right)$		46,200
	Common stock $\left(1,100\text{shares}\times \$0.01\right)$			11
	Additional paid-in-capital (balance)			46,189
	(To record the issue of common stock)
May 15, 2021	Treasury stock $\left(400\text{shares}\times \$35\right)$		14,000
	Cash			14,000
	(To record the purchase of treasury stock)
July 10, 2021	Cash $\left(200\text{shares}\times \$40\right)$		8,000
	Treasury stock $\left(200\text{shares}\times \$35\right)$			7,000
	Additional paid in capital $\left(200\text{shares}\times \$5\right)$			1,000
	(To record the sale of treasury stock above cost)
October 15, 2021	Cash $\left(200\text{shares}\times \$45\right)$		9,000
	Preferred stock $\left(200\text{shares}\times \$1\right)$			200
	Additional paid in capital (balance)			8,800
	(To record the issue of preferred stock)
December  15, 2021	Dividends $\left(5,400\text{ shares }\left(1\right)\times \text{\$0}\text{.5}\right)$		2,700
	Dividend payable			2,700
	(To record the declaration of cash dividend)
December  31, 2021	Dividend payable $\left(\text{5,400 shares }\left(1\right)\times \text{\$0}\text{.5}\right)$		2,700
	Cash			2,700
	(To record the payment of cash dividend)

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.

Preferred stock: Preferred stock is the cash raised by the company by issuing preferred shares. This investment fetches a preferential right for dividend for the preferred stockholders over the common stockholders.

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.

Issue of preferred stock:

• Cash (asset account) is increased. Thus, it is debited.
• Preferred stock (component of equity) is increased. 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.

Working note:

Compute the outstanding shares as on the date of dividend declaration:

At the beginning common stock is 4,000 shares and preferred stock is 300 shares.

Particulars	Shares
Shares at Beginning $\left(300+4,000\right)$	4,300
Add: Issued common stock	1,100
Less: Purchase of treasury stock	(400)
Add: Resell of treasury stock	200
Add: Issue of preferred stock	200
Shares outstanding on the date of dividend declaration	5,400

(1)

Table (2)

2.

To determine

Indicate whether each of these transactions would increase (+), decrease (-), or have no effect (NE) on total assets, total liabilities, and total stockholders' equity.

Explanation of Solution

Indicate whether each of these transactions would increase (+), decrease (-), or have no effect (NE) on total assets, total liabilities, and total stockholders' equity:

Transaction	Total Assets	Total Liabilities	Total Stockholders’ Equity
Issue common stock	+	NE	+
Purchase treasury stock	-	NE	-
Resell treasury stock	+	NE	+
Issue preferred stock	+	NE	+
Declare cash dividends	NE	+	-
Pay cash dividends	-	-	NE

Table (3)