Chapter 10, Problem 6PA

1.

To determine

Record the given transactions.

Answer to Problem 6PA

Record the given transactions:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 2, 2021	Cash $\left(110,000\text{shares}\times \$70\right)$		7,700,000
	Common stock $\left(110,00\text{shares}\times \$1\right)$			110,000
	Additional paid-in-capital (balance)			7,590,000
	(To record the issue of common stock)
February 14, 2021	Cash $\left(60,000\text{shares}\times \$12\right)$		720,000
	Preferred stock $\left(60,000\text{shares}\times \$10\right)$			600,000
	Additional paid in capital (balance)			120,000
	(To record the issue of preferred stock)
May 8, 2021	Treasury stock $\left(11,000\text{shares}\times \$60\right)$		660,000
	Cash			660,000
	(To record the purchase of treasury stock)
May 31, 2021	Cash $\left(5,500\text{shares}\times \$65\right)$		357,500
	Treasury stock $\left(5,500\text{shares}\times \$60\right)$			330,000
	Additional paid in capital $\left(5,500\text{shares}\times \$5\right)$			27,500
	(To record the sale of treasury stock above cost)
December 1, 2021	Dividends $\left[\left(104,500\text{ shares}\times \text{\$0}\text{.25}\right)+\$36,000\right]$		62,125
	Dividend payable			62,125
	(To record the declaration of cash dividend)
December 30, 2021	Dividend payable		62,125
	Cash			62,125
	(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.

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.

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.

2.

To determine

Prepare the stockholders’ equity section of the balance sheet as on December 31, 2021.

Explanation of Solution

Prepare the stockholders’ equity section of the balance sheet as on December 31, 2021:

Company MLA
Balance Sheet (partial)
As on December 31,2021
Liabilities and Stockholders’ equity	Amount $
Stockholders’ equity:
Preferred stock, $10 par value	$600,000
Common stock, $1 par value	110,000
Additional paid-in capital	7,737,500
Total paid-in capital	8,447,500
Retained earnings (1)	427,875
Treasury stock, 5,500 shares	(330,000)
Total stockholders’ equity	$8,545,375

Table (1)

Working note:

Compute the retained earnings:

$\begin{array}{c}\text{Retained earnings = Net income}-\text{Dividends}\\ \text{= \$490,000}-\text{\$62,125}\\ \text{=}\text{\$427,875}\end{array}$ (1)

Conclusion

Therefore, the total stockholder’s equity as on December 31, 2021 is $8,545,375.