Chapter 11, Problem 18E

1.

To determine

To prepare: Journal entry.

Answer to Problem 18E

Solution:

Treasury stock is purchased.

Date	Account Title and	Post ref	Debit($)	Credit($)
Jan 2	Treasury stocks		75,000
	Cash			75,000
	(Being treasury stocks is purchased )

Table (1)

• Treasury stocks are equity. Since, own equity is purchased, it reduces equity. Hence, debit treasury stocks account.
• Cash is an asset. Since, cash is used to purchase treasury stock, it reduces asset. Hence credit cash account.

Declared a cash dividend payable:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Jan 7	Retained earnings		40,500
	Dividend payable			40,500
	(Being dividend is declared and it became a liability )

Table (2)

• Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit retained earnings account
• Dividend payable is a liability. Since, dividend is an expense but not paid yet, it increases liability. Hence, credit dividend payable account.

Dividend paid which was declared on Jan 7.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Feb 28	Dividend payable		40,500
	Cash			40,500
	(Being dividend is paid )

Table (3)

• Common stock dividend payable is a liability. Since, dividend is paid, it decreases liability. Hence, debit common stock dividend payable account.
• Cash is an asset. Since, cash is used to pay dividend, it reduces asset. Hence credit cash account.

Some of the treasury stock reissued.

Date	Account Title and	Post ref	Debit($)	Credit($)
July 9	Cash		36,000
	Treasury stocks			30,000
	Paid in capital in excess of par value, treasury stock			6,000
	(Being dividend is paid )

Table (4)

• Cash is an asset. Since, cash is received, it increases asset. Hence debit cash account.
• Treasury stock is equity. Since, shares is issued, it increases equity. Hence, credit treasury stock account.
• Paid in capital in excess of par value, treasury stock is part of a shareholder’s fund. Since, money is received, it increases equity. Hence, credit paid in capital in excess of par value, treasury stock.

Some of the treasury stock reissued.

Date	Account Title and	Post ref	Debit($)	Credit($)
Aug 27	Cash		30,000
	Paid in capital in excess of par value, treasury stock		6,000
	Retained Earnings		1,500
	Treasury stocks			37,500
	(Being dividend is paid )

Table (5)

• Cash is an asset. Since, cash is received, it increases asset. Hence debit cash account.
• Paid in capital in excess of par value, treasury stock is part of a shareholder’s fund. Since, money is used, it decreases equity. Hence, debit paid in capital in excess of par value, treasury stock.
• Retained earnings are a part of equity. Since, shares is issued at below face value, it create loss and reduces equity. Hence, debit retained earnings account.
• Treasury stock is equity. Since, shares is issued, it increases equity. Hence, credit treasury stock account.

Declared a cash dividend payable:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Sep 9	Retained earnings		59,400
	Dividend payable			59,400
	(Being dividend is declared and it became a liability )

Table (6)

• Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit retained earnings account
• Dividend payable is a liability. Since, dividend is an expense but not paid yet, it increases liability. Hence, credit dividend payable account.

Dividend paid which was declared on Sep 9.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Oct 22	Dividend payable		59,400
	Cash			59,400
	(Being dividend is paid )

Table (7)

• Common stock dividend payable is a liability. Since, dividend is paid, it decreases liability. Hence, debit common stock dividend payable account.
• Cash is an asset. Since, cash is used to pay dividend, it reduces asset. Hence credit cash account.

Income Summary transfer to retained earnings account for closing:

Date	Particulars	Post ref	Debit($)	Credit($)
Dec 31	Income Summary		52,000
	Retained Earning			52,000
	(Being net income transfer to retained earnings)

Table (8)

Explanation of Solution

• Income summary is a temporary account. Since, it is used for transferring net income summary to retained account. Hence, debit income summary account.
• Retained earnings come under stockholder’s equity. Since, retained earning has increased. Hence, credit retained earning account.

2.

To determine

To prepare: Statement of retained earnings/

Explanation of Solution

A. Company
Retained Earnings Statement
For the year ended December 31, 2017
Particulars	Amount ($)
Opening balance	340,000
Net income	52,000
Dividends	(99,900)
Treasury stock	(1,500)
Retained earnings	290,600

                                                     Table (9)

Hence, retained earnings are $290,600.

3.

To determine

To prepare: Stockholder’s equity section of balance sheet.

Explanation of Solution

A. Company
Partial Balance Sheet
As on December 31, 2017
Particulars	Amount ($)
Common stock-$25 par value, 50,000 shares authorized, 30,000 shares issued and outstanding	750,000
Paid in capital in excess of par value, common stock	50,000
Retained earnings	290,600
Retained earnings	1,090,600

                                                     Table (10)

Hence, stockholder’s equity is $1,090,600.