Chapter 11, Problem 1GLP

To determine

Stockholder’s Equity:

It is that part of the company's liabilities that are used to finance the operations of the business. They are the owner of the business. It generally has two types one is common stock and other is preferred stock.

Journal Entries:

It is a book of original entry. It records and summarizes financial transaction of an entity in chronological manner, generally according to dual aspect of accounting.

Accounting rules regarding journal entries:

• Balance increase when: Assets, losses and expenses get debited and liabilities, gains, and revenue get credited.
• Balance decrease when: Assets, losses and expenses get credited and liabilities, gains, and revenue get debited.

Treasury Stock:

It is the type of stock that company keeps with itself either by not issuing the shares or by buying back of shares.

1.

To prepare: Journal entry, statement of retained earnings and stockholder’s equity.

Explanation of Solution

Prepare journal entries:

Treasury stock is purchased.

Date	Account Title and	Post ref	Debit($)	Credit($)
Jan 1	Treasury stocks		80,000
	Cash			80,000
	(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 5	Retained earnings		72,000
	Dividend payable			72,000
	(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 5.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Feb 28	Dividend payable		72,000
	Cash			72,000
	(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 6	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 22	Cash		42,500
	Paid in capital in excess of par value, treasury stock		6,000
	Retained Earnings		1,500
	Treasury stocks			50,000
	(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 5	Retained earnings		80,000
	Dividend payable			80,000
	(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 5.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Oct 28	Dividend payable		80,000
	Cash			80,000
	(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		388,000
	Retained Earning			388,000
	(Being net income transfer to retained earnings)

Table (8)

• 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.

Prepare retained earnings statement.

K. Company
Retained Earnings Statement
For the year ended December 31, 2017
Particulars	Amount($)
Opening balance	270,000
Net income	388,000
Dividends	(152,000)
Treasury stock	(1,500)
Retained earnings	504,500

Table (9)

Hence , retained earnings are $506,000 .

Prepare stockholder’s Equity.

K. Company
Stockholder’s Equity
For the year ended December 31, 2017
Particulars	Amount($)
Common stock-$25 par value, 50,000 shares authorized, 30,000 shares issued and outstanding	400,000
Paid in capital in excess of par value, common stock	60,000
Retained earnings	504,500
Retained earnings	964,500

Table (10)

Hence , stockholder’s equity is $964,500 .