Chapter 11, Problem 13AE

a.

To determine

Ascertain the total number of outstanding shares at the end of the period.

Explanation of Solution

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.

Ascertain the total number of outstanding shares at the end of the period as follows:

Common Stock	Outstanding
Beginning Number of Shares	2,000
Issued This Period	3,000
Less: Repurchased as Treasury Stock	(500)
Resold Treasury Stock	200
Ending number of shares	4,700

Table (1)

Therefore, the total number of outstanding shares at the end of the period is 4,700 shares.

b.

To determine

Ascertain the total number of issued shares at the end of the period.

Explanation of Solution

Ascertain the total number of issued shares at the end of the period as follows:

Common Stock	Issued
Beginning Number of Shares	2,000
Issued This Period	3,000
Ending Number of Shares	5,000

Table (2)

Therefore, the total number of issued shares at the end of the period is 5,000 shares.

c.

To determine

Prepare the journal entries for the given transaction, and post to T-accounts.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

T-account:

T-account refers to an individual account, where the increase or decrease in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

Prepare the journal entries for the given transaction, and post to T-accounts as follows:

Journal entries:

1. Issued 3,000 common stock of $25 par ($10 par)

Date	Account Titles	Debit ($)	Credit ($)
	Cash (1)	75,000
	Common Stock, $10 par (2)		30,000
	Paid-in Capital in Excess of Par, CS (3)		45,000
	(To record issuance of 3,000 shares in excess of par)

Table (3)

• Cash is an asset account, and it increases the value of cash account by $75,000. Therefore, debit cash account for $75,000.
• Common Stock is a component of stockholders’ equity and it increases the value of common stock by $30,000. Therefore, credit common Stock account for $30,000.
• Paid-in Capital in Excess of Par Value – Common stock is a component of stockholders’ equity and it increases the value of common stock by $45,000. Therefore, credit Paid-in Capital in Excess of Par Value account for $45,000.

Working note:

Calculate the value of cash received from the issuance of common stock.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Issued value of common stock}\\ \text{= 3,000 shares × \$25}\\ \text{= \$75,000}\end{array}$ (1)

Calculate the value of common stock issued at par value

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value of common stock}\\ \text{= 3,000 shares × \$10}\\ \text{= \$30,000}\end{array}$ (2)

Calculate the value of paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received }\left(1\right)\text{–}\\ \text{Common stock value }\left(2\right)\end{array}\right)\\ \text{= \$75},000\text{ – \$30,000}\\ \text{= \$45,000}\end{array}$ (3)

2. Repurchased 500 shares for $26 per share

Date	Account Titles	Debit ($)	Credit ($)
	Treasury Stock (4)	13,000
	Cash		13,000
	(To record purchase of treasury stock)

Table (4)

• Treasury stock is contra-stockholders’ equity account with a normal balance of debit. Thus, when treasury stocks are purchased, it decreases the stockholders’ equity account. In this case, it reduces the stockholders’ equity by $13,000. Therefore, treasury stock account is debited with $13,000.
• Cash is an asset account, and it decreases the value of cash account by $13,000. Therefore, credit cash account for $13,000.

Working note:

Calculate the value of treasury stock:

$\begin{array}{c}\text{Treasury stock = }\left[\begin{array}{l}\text{Number of repurchase shares}\times \\ \text{ Value of per share}\end{array}\right]\\ \text{=500}\times \text{\$26 per share}\\ \text{=\$13,000}\end{array}$ (4)

3. Resold 200 shares of treasury stock for $30 per share

Date	Account Titles	Debit ($)	Credit ($)
	Cash (5)	6,000
	Treasury Stock (6)		5,200
	Paid-In Capital in Excess of Cost, TS (7)		800
	(To record sale of treasury stock for above the cost price)

Table (5)

• Cash is an asset account, and it increases the value of cash account by $6,000. Therefore, debit cash account for $6,000.
• Treasury stock is contra-stockholders’ equity account with a normal balance of debit. Thus, when treasury stocks are sold at its cost price, then cash would be debited and treasury stock would be credited. But, when treasury stocks are sold for higher than its cost price, then cash would be debited and treasury stock would be credited for cost price, and paid-in capital from treasury stock would be credited for excess selling price.

Working note:

Calculate the value of cash received from the resold of treasury stock.

$\begin{array}{c}\text{Cash received = Number of resold shares }\times \text{ Selling price per share}\\ \text{= 200 shares × \$30}\\ \text{= \$6,000}\end{array}$ (5)

Calculate the value of treasury stock resold at original cost

$\begin{array}{c}\text{Treasury stock = Number of resold shares }\times \text{ Original cost per share}\\ \text{= 200 shares × \$26}\\ \text{= \$5,200}\end{array}$ (6)

Calculate the value of paid-in capital in excess of cost, TS.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of cost}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received }\left(5\right)\text{–}\\ \text{Common stock value }\left(6\right)\end{array}\right)\\ \text{= \$6},000\text{ – \$5,200}\\ \text{= \$800}\end{array}$ (7)

T-accounts:

Cash (partial)
Bal.
1. 75,000	2. 13,000
3. 6,000

Common Stock
	Bal. 20,000
	1. 30,000
	Bal. 50,000

Paid in capital in excess of Par, CS
	Bal. 15,000
	1. 45,000
	Bal. 60,000

Treasury Stock
2. 13,000	3. 5,200
Bal. 7,800

Paid in capital in excess of cost, TS
	3. 800
	Bal. 800

d.

To determine

Prepare the stockholder’s equity section of the balance sheet.

Explanation of Solution

Stockholders’ Equity Section:

Stockholder’s equity section is the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.

Prepare the stockholder’s equity section of the balance sheet as follows:

Stockholders’ Equity	$	$
Common Stock, $10 par value, 20,000 shares authorized, 5,000 shares issued, and 4,700 shares outstanding	50,000
Paid-In Capital in Excess of Par, Common	60,000
Paid-In Capital in Excess of Cost, TS	800
Total Paid-In Capital		110,800
Add: Retained Earnings		82,000
Less: Treasury Stock		(7,800)
Total Stockholders’ Equity		185,000

Table (6)

Therefore, the total value of stockholder’s equity at the end of the year is $185,000.