
Concept explainers
(1) and (2)
Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.
Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.
Stated value: It refers to an amount per share, which is assigned by the board of directors to no par value stock.
Issue of common stock for non-cash assets or services: Corporations often issue common stock for the services received from attorneys or consultants as compensation, or for the purchase of non-cash assets such as land, buildings, or equipment.
This is a financial statement that shows the amount of the net income retained by a company at a particular point of time for reinvestment and pays its debts and obligations. It shows the amount of retained earnings that is not paid as dividends to the shareholders.
To Journalize: The
(1) and (2)

Explanation of Solution
Record the transactions for Incorporation NE.
Date | Account Titles and Explanation | Debit ($) | Credit ($) | |
2016 | ||||
January | 15 | Cash Dividends Payable | 34,320 | |
Cash | 34,320 | |||
(To record the payment of cash dividends) | ||||
March | 15 | Cash (48,000 shares×$6.75) | 324,000 | |
Treasury stock (48,000 shares ×(1)$6 per share) |
288,000 | |||
Paid-in capital from treasury stock ($324,000−$288,000) |
36,000 | |||
(To record sale of treasury stock for above the cost price of $6 per share) | ||||
April | 13 | Cash (200,000 shares×$8) | 1,600,000 | |
Common Stock (200,000 shares×$5) | 1,000,000 | |||
Paid-in Capital in Excess of stated value Common Stock ($1,600,000−$1,000,000) |
600,000 | |||
(To record issuance of 200,000 shares in excess of stated value) | ||||
June | 14 | Stock Dividends (4) | 184,500 | |
Common Stock Dividends Distributable (5) |
123,000 | |||
Paid-in Capital in excess of Stated Value-Common stock (6) |
61,500 | |||
(To record the declaration of stock dividends) | ||||
July | 16 | Common Stock Dividends Distributable (5) | 123,000 | |
Common Stock | 123,000 | |||
(To record the distribution of stock dividends) | ||||
October | 30 | Treasury stock (50,000 shares×$6 per share) | 300,000 | |
Cash | 300,000 | |||
(To record the purchase of 50,000 shares of treasury stock) | ||||
December | 30 | Cash Dividends (8) | 63,568 | |
Cash Dividends Payable | 63,568 | |||
(To record the declaration of cash dividends) | ||||
December | 31 | Income summary | 775,000 | |
Retained Earnings | 775,000 | |||
(To close the income summary account) | ||||
December | 31 | Retained Earnings | 248,068 | |
Stock dividends (4) | 184,500 | |||
Cash Dividends (8) | 63,568 | |||
(To record the closing of stock dividends and cash dividends to retained earnings account) |
Table (1)
Working note:
Calculate treasury stock cost per share.
Treasury stock cost per share=[Total value of treasury stockat hand as on January 1, 2016][Number of treasury stockat hand as on January 1, 2016]=$288,00048,000 shares=$6 per share (1)
Compute number of shares outstanding after the issuance of common stock on April 13.
Number of shares outstandingafter the issuance of commonstock on April 13}=[Number of shares outstandingas of January 1, 2016 + Numbershares issued on April 13]=620,000 shares +200,000 shares=820,000 shares (2)
Compute the stock dividends shares.
Stock dividends shares = {Number of shares outstanding afterthe issuance of common stock on April 13×Stock dividend percentage}=820,000 shares (2)× 3%= 24,600 shares (3)
Compute the stock dividends amount payable to common stockholders.
Stock dividends = Stock dividend shares × Market value per share= 24,600 shares(3) × $7.50= $184,500 (4)
Compute common stock dividends distributable value.
Common stock dividenddistributable value} = Stock dividend shares × Par value of stock= 24,600 shares(3)× $5= $123,000 (5)
Compute paid-in capital in excess of par value-common stock.
Paid-in capital = Stock dividends –Common stock dividend distributable value= $184,500(4) – $123,000(5)= $61,500 (6)
Compute number of shares outstanding as on December 30.
Number of shares outstandingas on December 30}=[Number of shares outstanding after theissuance of common stock on April 13+Issuance of stock dividends on June 14−Purchase of treasury stock on October 30]=[820,000 shares(2)+24,600 shares(3)−50,000 shares]=794,600 shares (7)
Calculate the amount of cash dividend declared on December 28.
Cash dividend declared on December 30 = [Number of shares outstanding ason December 30×$0.08 per share]=794,600 shares(7)×$0.08 per share=$63,568 (8)
(b)
To Post: The above
(b)

Explanation of Solution
Enter the beginning balance and post the transactions into the stockholders’ equity accounts for Incorporation NE.
Common stock account is a component of stockholder’s equity with a normal credit balance.
Common stock | |||||
Date | Particulars | Debit | Date | Particulars | Credit |
January 1 | Balance | $3,100,000 | |||
April 13 | Cash | $1,000,000 | |||
July 16 | Stock dividends distributable | $123,000 | |||
Total | $ 0 | Total | 4,223,000 | ||
December 31 | Balance | $4,223,000 |
Table (2)
Paid-in capital in excess of stated value - Common stock account is a component of stockholder’s equity with a normal credit balance.
Paid-in capital in excess of stated value - Common stock | |||||
Date | Particulars | Debit | Date | Particulars | Credit |
January 1 | Balance | $1,240,000 | |||
April 13 | Cash | $600,000 | |||
June 14 | Stock dividends | $61,500 | |||
Total | $ 0 | Total | $ 1,901,500 | ||
December 31 | Balance | $ 1,901,500 |
Table (3)
Retained earnings are a component of stockholder’s equity with a normal credit balance.
Retained earnings | |||||
Date | Particulars | Debit | Date | Particulars | Credit |
December 31 | Cash and stock dividends | $248,068 | January 1 | Balance | $4,875,000 |
December 31 | Income summary | $775,000 | |||
Total | $248,068 | Total | $5,650,000 | ||
December 31 | Balance | $5,401,932 |
Table (4)
Treasury stock is a component of stockholder’s equity with a normal debit balance.
Treasury stock | |||||
Date | Particulars | Debit | Date | Particulars | Credit |
January 1 | Balance | $288,000 | March 15 | Cash | $288,000 |
October 30 | Cash | $300,000 | |||
Total | $ 588,000 | Total | $288,000 | ||
December 31 | Balance | $ 300,000 |
Table (5)
Paid-in capital from treasury stock is a component of stockholder’s equity with a normal credit balance.
Paid-in capital from treasury stock | |||||
Date | Particulars | Debit | Date | Particulars | Credit |
March 15 | Cash | $36,000 | |||
Total | $ 0 | Total | $36,000 | ||
December 31 | Balance | $36,000 |
Table (6)
Stock dividend distributable is a contra stockholder’s equity with a normal credit balance.
Stock dividend distributable | |||||
Date | Particulars | Debit | Date | Particulars | Credit |
July 16 | Common stock | $123,000 | June 14 | Stock dividend | $123,000 |
Total | $123,000 | Total | $123,000 | ||
December 31 | Balance | $0 |
Table (7)
Stock dividend is a component of stockholder’s equity with a normal debit balance.
Stock dividend | |||||
Date | Particulars | Debit | Date | Particulars | Credit |
June 14 | Stock dividend distributable | $123,000 | December 31 | Retained earnings | $184,500 |
July 5 | Paid in capital in excess of stated value –Common value | $61,500 | |||
Total | $184,500 | Total | $184,500 | ||
December 31 | Balance | $0 |
Table (8)
Cash dividend is a component of stockholder’s equity with a normal debit balance.
Stock dividend | |||||
Date | Particulars | Debit | Date | Particulars | Credit |
December 30 | Cash dividend payable | $63,568 | December 31 | Retained earnings | $63,568 |
Total | $63,568 | Total | $63,568 | ||
December 31 | Balance | $0 |
Table (9)
(3)
To prepare: a retained earnings statement for the year ended December 31, 2016.
(3)

Explanation of Solution
Prepare a retained earnings statement for the year ended December 31, 2016.
Incorporation NE | |||
Retained Earnings Statement | |||
For the Year Ended December 31, 2016 | |||
Retained earnings, January 1, 2016 | $4,875,000 | ||
Net income for year | $775,000 | ||
Less: Dividends: | |||
Cash | -$63,568 | ||
Stock | -$184,500 | -$248,068 | |
Change in retained earnings | $526,932 | ||
Retained earnings, December 31, 2016 | $5,401,932 |
Table (10)
(4)
To prepare: The stockholders’ equity section of the December 31, 2016,
(4)

Explanation of Solution
Prepare the stockholders’ equity section of the December 31, 2016, balance sheet.
Incorporation NE | |||
Partial Balance Sheet | |||
December 31, 2016 | |||
Stockholders' Equity | Amount | Amount | Amount |
Paid-in capital: | |||
Common stock, $5 stated (900,000 shares authorized; 620,000 shares issued, 844,600 shares outstanding) | $4,223,000 | ||
Excess over stated value | $1,901,500 | ||
Paid-in capital, common stock | $6,124,500 | ||
From sale of treasury stock | $36,000 | ||
Total paid-in capital | $6,160,000 | ||
Retained earnings | $5,401,932 | ||
Total | $11,562,432 | ||
Treasury common stock (50,000 shares at cost) | -$300,000 | ||
Total stockholders' equity | $11,262,432 |
Table (11)
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