Concept explainers
Analyzing
Worldwide Company obtained a charter from the state in January that authorized 200,000 shares of common stock, $10 par value. During the first year, the company earned $38,200 and the following selected transactions occurred in the order given:
- a. Issued 60,000 shares of the common stock at $12 cash per share.
- b. Reacquired 2,000 shares at $15 cash per share from stockholders; the shares are now held in treasury.
- c. Reissued 1,000 of the shares in transaction (b) two months later at $18 cash per share.
Required:
- 1. Indicate the effects of each transaction on the accounting equation.
- 2. Prepare journal entries to record each transaction.
- 3. Prepare the stockholders’ equity section of the balance sheet at December 31.
TIP: Because this is the first year of operations,
Retained Earnings has a zero balance at the beginning of the year.
a.
To indicate: The effects of each transaction on the accounting equation.
Explanation of Solution
Accounting equation:
Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
The effects of each transaction:
- a. Issued 60,000 shares of the common stock at $12 per share.
Calculate the cash:
Calculate the amount for common stock:
Calculate the amount for additional paid in capital:
Assets | Liabilities | Stockholders’ equity | |||
a. | Cash | +720,000(1) | No effect | Common stock Additional paid-in capital common |
+600,000(2) +120,000(3) |
Table (1)
- b. Required 2,000 shares at $15 cash per share from stockholders; the shares are now held in treasury.
Assets | Liabilities | Stockholders’ equity | |||
b. | Cash | -30,000 | No effect |
Treasury stock (+xSE) |
-30,000 |
Table (2)
- c. Reissued 1000 shares in transaction (b) two months; later at $18 cash per share.
Calculate the cash:
Calculate the treasury stock:
Calculate the additional paid in treasury:
Assets | Liabilities | Stockholders’ equity | |||
c. | Cash | +18,000(4) | No effect | Treasury stock (-xSE) Additional paid-in capital treasury |
+15,000(5) +3,000(6) |
Table (3)
a.
- Common stock is issued for cash. Hence, the effect on the accounting equation is increase in cash (asset) and increase in stockholders’ equity (Common stock).
b.
- Reacquired shares from the stockholders that are kept in the treasury. Hence, the effect on the accounting equation is decrease in cash (asset) and increase in the contra-equity decreases the Stockholders’ equity).
c.
- Reissued the stocks. Hence, the effect on the accounting equation is increase in cash (asset) and decrease in contra equity increases the stockholders’ equity. And increase in the additional paid in capital-treasury increases the stockholders’ equity.
b.
To prepare: The journal entry for each transaction.
Explanation of Solution
Journal:
Journal is the book of original entry. Journal consists of the day-to-day financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.
Prepare the journal entries:
- a. Journal entry for issuance of common stock:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
a. | Cash
|
720,000 | ||
Common stock
|
600,000 | |||
Additional paid in capital, common stock
|
120,000 |
|||
(To record the issuance of common stock to investors at premium) |
Table (4)
- Cash is an asset. There is an increase in the cash. Hence, debit cash account with $720,000.
- Common stock is a component of stockholders’ equity. There is an increase in the common stock which increases the stockholders’ equity. Hence, credit stockholders’ equity with $600,000.
- Additional paid in capital (common stock), there is an issue of stocks at premium of $2. There is an increase in the common stock which increases the stockholders’ equity. Hence, credit additional paid in capital with $120,000.
- b. Journal entry for reacquiring of shares from stockholders:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
b. | Treasury stock
|
30,000 | ||
Cash | 30,000 | |||
(To record the reacquiring of shares from the stockholders) |
Table (5)
- Treasury stock is the contra-equity. There is an increase in the contra-equity which decreases the stockholders’ equity. Hence, debit the treasury stock with $30,000.
- Cash is an asset. There is a decrease in the asset. Hence, credit cash account with $30,000.
- c. Journal entry for reissuance of treasury stock:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
c. | Cash
|
18,000 | ||
Treasury stock
|
15,000 | |||
Additional paid in capital, common stock
|
3,000 |
|||
(To record the issuance of common stock to investors at premium) |
Table (6)
- Cash is an asset. There is an increase in the asset. Hence, credit cash account with $18,000.
- Treasury stock is a contra-equity. There is a decrease in the contra equity which increases stockholders’ equity. Hence, credit treasury stock with $15,000.
- Additional paid in capital (Common stock) there is an issuance of stock at higher than the purchased price. Hence, credit additional paid in capital with $3,000.
3.
To prepare: The stockholders’ equity section of the balance sheet at 31st December.
Explanation of Solution
Balance Sheet:
Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Prepare the stockholders’ equity section of the balance sheet:
Balance sheet (Partial) | ||
Stockholders' equity -December 31 | ||
Particulars | amount($) | Amount($) |
Contributed capital: | ||
Common stock
|
$600,000 | |
Additional paid in capital, common stock
|
$120,000 | |
Additional paid in capital, Treasury stock | $3,000 | |
Total contributed capital | 723,000 | |
Retained earnings | $38,200 | |
Total contributed capital | $761,200 | |
Less: Treasury stock at cost(7) | ($15,000) | |
Total stockholders' equity | $746,200 |
Table (7)
Working note:
Calculate the amount of treasury stock at cost:
Thus, the stockholders’ equity section of the balance sheet is prepared and it shows the total stock holders’ equity as $746,200.
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Chapter 11 Solutions
FUNDAMENTALS OF FINANCIAL ACCOUNTING LL
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