Chapter 10, Problem 7E

To determine

Prepare the stockholders’ equity section of the balance sheet as of December 31, 2021 for Company FT.

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 of December 31, 2021 of Company FT is as follows:

Company FT
Balance Sheet (Stockholders’ Equity Section)
As on December 31, 2021
Stockholders’ equity:	Amount ($)
Preferred stock, $10 par value	$30,000
Common stock, $1.00 par value	$100,000
Additional paid-in capital (2)	$3,430,500
Total paid-in capital	$3,560,500
Retained earnings (1)	$63,100
Treasury stock, 5,500 shares	$(220,000)
Total stockholders’ equity	$3,403,600

Table (1)

Working Note:

Calculate retained earnings:

$\begin{array}{c}\text{Retained earnings}=\text{Net income}-\left(\text{Common stock dividend}+\text{Preferred stock dividend}\right)\\ =\$160,000–\left(\$94,500+\$2,400\right)\\ =\$63,100\end{array}$ (1)

Record the given transactions:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 2, 2021	Cash $\left(100,000\text{shares}\times \$35\right)$		3,500,000
	Common stock $\left(100,000\text{shares}\times \$1\right)$			100,000
	Additional paid-in-capital (balance)			3,400,000
	(To record the issue of common stock)
February 6, 2021	Cash $\left(3,000\text{shares}\times \$11\right)$		33,000
	Preferred stock $\left(3,000\text{shares}\times \$10\right)$			30,000
	Additional paid in capital (balance)			3,000
	(To record the issue of preferred stock)
September 10, 2021	Treasury stock $\left(11,000\text{shares}\times \$40\right)$		440,000
	Cash			440,000
	(To record the purchase of treasury stock)
December 15, 2021	Cash $\left(5,500\text{shares}\times \$45\right)$		247,500
	Treasury stock $\left(5,500\text{shares}\times \$40\right)$			220,000
	Additional paid in capital $\left(5,500\text{shares}\times \$5\right)$			27,500
	(To record the sale of treasury stock above cost)

Table (2)

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.

Calculate additional paid in capital:

$\begin{array}{c}\text{Additional paid in capital}=\left(\begin{array}{l}\text{Common }\\ \text{stock issued}\end{array}\right)+\left(\begin{array}{l}\text{Preferred }\\ \text{stock issued}\end{array}\right)+\left(\begin{array}{l}\text{Treasury }\\ \text{stock issued}\end{array}\right)\\ =\$3,400,000+\$3,000+\$27,500\\ =\$3,430,500\end{array}$ (2)

Calculate treasury stock:

$\begin{array}{c}\text{Treasury stock}=\left(\begin{array}{l}\text{Purchase of}\\ \text{ treasury stock}\end{array}\right)-\left(\begin{array}{l}\text{Sale of treasury}\\ \text{ stock}\end{array}\right)\\ =\$440,000-\$220,000\\ =\$220,000\end{array}$ (3)