Chapter 11, Problem 11.4BPR

(1) and (2)

To determine

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.

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

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.

Retained earnings statement

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.

Stockholders’ equity: It refers to the amount of capital that includes the amount of investment by the stockholders, earnings generated from the normal business operations, and less any dividends paid to the stockholders.

To Journalize: The transactions and post to the eight selected accounts.

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 $\left(\text{48,000 shares}\times \text{\$6}\text{.75}\right)$	324,000
		Treasury stock          $\left(\text{48,000 shares }\times \left(1\right)\text{\$6 per share}\right)$		288,000
		Paid-in capital from treasury stock $\left(\$324,000-\$288,000\right)$		36,000
		(To record sale of treasury stock for above the cost price of $6 per share)
April	13	Cash $\left(\text{200,000 shares}\times \text{\$8}\right)$	1,600,000
		Common Stock $\left(\text{200,000 shares}\times \text{\$5}\right)$		1,000,000
		Paid-in Capital in Excess of stated value       Common Stock $\left(\$1,600,000-\$1,000,000\right)$		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 $\left(\text{50,000 shares}\times \text{\$6 per share}\right)$	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.

$\begin{array}{c}\text{Treasury stock cost per share=}\frac{\left[\begin{array}{l}\text{Total value of treasury stock}\\ \text{at hand as on January 1, }2016\end{array}\right]}{\left[\begin{array}{l}\text{Number of treasury stock}\\ \text{at hand as on January 1, }2016\end{array}\right]}\\ =\frac{\$288,000}{48,000\text{ shares}}\\ =\$6\text{ per share}\end{array}$ (1)

Compute number of shares outstanding after the issuance of common stock on April 13.

$\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{after the issuance of common}\\ \text{stock on}\text{April 13}\end{array}\}=\left[\begin{array}{l}\text{Number of shares outstanding}\\ \text{as of January 1, 2016 + Number}\\ \text{shares issued on April 13}\end{array}\right]\\ \text{=620},000\text{ shares +200,000 shares}\\ \text{=820,000 shares}\end{array}$ (2)

Compute the stock dividends shares.

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding after}\\ \text{the issuance of common stock on April 13×}\\ \text{Stock dividend percentage}\end{array}\right\}\\ \text{=820,000 shares }\left(2\right)\text{× 3\%}\\ \text{= 24,600 shares}\end{array}$ (3)

Compute the stock dividends amount payable to common stockholders.

$\begin{array}{c}\text{Stock dividends = Stock dividend shares }\times \text{ Market value per share}\\ \text{= 24,600 shares}\left(3\right)\text{ × \$7}\text{.50}\\ \text{= \$184,500}\end{array}$ (4)

Compute common stock dividends distributable value.

$\begin{array}{c}\begin{array}{l}\text{Common stock dividend}\\ \text{distributable value}\end{array}\}\text{ = Stock dividend shares }\times \text{ Par value of stock}\\ \text{= 24,600 shares}\left(3\right)\text{× \$5}\\ \text{= \$123,000}\end{array}$ (5)

Compute paid-in capital in excess of par value-common stock.

$\begin{array}{c}\text{Paid-in capital = Stock dividends –Common stock dividend distributable value}\\ \text{= \$184,500}\left(4\right)\text{ – \$123,000}\left(5\right)\\ \text{= \$61,500}\end{array}$ (6)

Compute number of shares outstanding as on December 30.

$\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{as on December 30}\end{array}\}=\left[\begin{array}{l}\text{Number of shares outstanding after the}\\ \text{issuance of common stock on April 13}+\\ \text{Issuance of stock dividends on June 14}-\\ \text{Purchase of treasury stock on October 30}\end{array}\right]\\ =\left[\begin{array}{l}820,000\text{ shares}\left(2\right)\text{+24,600 shares}\left(3\right)\\ -50,000\text{ shares}\end{array}\right]\\ \text{=794,600 shares}\end{array}$ (7)

Calculate the amount of cash dividend declared on December 28.

$\begin{array}{c}\text{Cash dividend declared on December 30 = }\left[\begin{array}{l}\text{Number of shares outstanding as}\\ \text{on December 30}\times \text{\$0}\text{.08 per share}\end{array}\right]\\ =794,600\text{ shares}\left(7\right)\times \text{\$0}\text{.08 per share}\\ =\$63,568\end{array}$ (8)

(b)

To determine

To Post: The above journal entries into the stockholders’ equity accounts for Incorporation NE.

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 determine

To prepare: a retained earnings statement for the year ended December 31, 2016.

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 determine

To prepare: The stockholders’ equity section of the December 31, 2016, balance sheet.

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)