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1.
Record the given transactions.
1.
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Answer to Problem 6PB
Record the given transactions:
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
February 2, 2021 | Cash | 52,500,000 | ||
Common stock | 7,500,000 | |||
Additional paid-in-capital (balance) | 45,000,0000 | |||
(To record the issue of common stock) | ||||
February 4, 2021 | Cash | 13,800,000 | ||
Preferred stock | 12,000,000 | |||
Additional paid in capital (balance) | 1,800,000 | |||
(To record the issue of preferred stock) | ||||
June 15, 2021 | 4,500,000 | |||
Cash | 4,500,000 | |||
(To record the purchase of treasury stock) | ||||
August 15, 2021 | Cash | 5,062,500 | ||
Treasury stock | 3,375,000 | |||
Additional paid in capital | 1,687,500 | |||
(To record the sale of treasury stock above cost) | ||||
November 1, 2021 | Dividends | 2,673,750 | ||
Dividend payable | 2,673,750 | |||
(To record the declaration of cash dividend) | ||||
November 30, 2021 | Dividend payable | 2,673,750 | ||
Cash | 2,673,750 | |||
(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
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
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.
Prepare the
2.
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Explanation of Solution
Prepare the stockholders’ equity section of the balance sheet as on December 31, 2021:
Company NLG | |
Balance Sheet (partial) | |
As on December 31, 2021 | |
Liabilities and Stockholders’ equity | Amount $ |
Stockholders’ equity: | |
Preferred stock, $20 par value | $12,000,000 |
Common stock, $5 par value | 7,500,000 |
Additional paid-in capital | 48,487,500 |
Total paid-in capital | 67,987,500 |
Retained earnings (1) | 2,226,250 |
Treasury stock, 37,500 shares | (1,125,000) |
Total stockholders’ equity | $69,088,750 |
Table (1)
Working note:
Compute the retained earnings:
Therefore, the total stockholder’s equity as on December 31, 2021 is $69,088,750.
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