Chapter 10, Problem 2PB

1.

To determine

Record the given transactions.

Answer to Problem 2PB

Record the given transactions:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 1, 2021	Cash $\left(3,000\text{shares}\times \$10\right)$		30,000
	Common stock $\left(3,000\text{shares}\times \$1\right)$			3,000
	Additional paid-in-capital (balance)			27,000
	(To record the issue of common stock)
April 1, 2021	Cash $\left(175\text{shares}\times \$40\right)$		7,000
	Preferred stock $\left(175\text{shares}\times \$10\right)$			1,750
	Additional paid in capital (balance)			5,250
	(To record the issue of preferred stock)
June 1, 2021	Dividends $\left(6,300\text{ shares}\times \text{\$0}\text{.25}\right)$ (1)		1,575
	Dividend payable			1,575
	(To record the declaration of cash dividend)
June 30, 2021	Dividend payable $\left(6,300\text{ shares}\times \text{\$0}\text{.25}\right)$		1,575
	Cash			1,575
	(To record the payment of cash dividend)
August 1, 2021	Treasury stock $\left(175\text{shares}\times \$7\right)$		1,225
	Cash			1,225
	(To record the purchase of treasury stock)
October 1, 2021	Cash $\left(125\text{shares}\times \$9\right)$		1,125
	Treasury stock $\left(125\text{shares}\times \$7\right)$			875
	Additional paid in capital $\left(125\text{shares}\times \$2\right)$			250
	(To record the sale of treasury stock above cost)

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.

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.

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.

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 $\left(125+3,000\right)$	3,125
Add: Issued common stock	3,000
Add: Issue of preferred stock	175
Shares outstanding on the date of dividend declaration	6,300

(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	+
Issue preferred stock	+	NE	+
Declare cash dividends	NE	+	-
Pay cash dividends	-	-	NE
Purchase treasury stock	-	NE	-
Resell treasury stock	+	NE	+

Table (2)