Chapter 11, Problem 25AP

a.

To determine

Prepare journal entries for the transactions of Year 1 and Year 2 and post them to T-accounts.

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.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Prepare journal entries for the transactions of Year 1 and Year 2.

Date	Account Titles and Explanation	Debit	Credit
Year 1
January 5	Cash (6,000 x $15)	90,000
	Common Stock, $10 par		60,000
	Paid In Capital in Excess of Par-Common stock		30,000
	(To record the issuance of common stock)
January 12	Cash (1,000 x $55)	55,000
	Preferred Stock, $50 par		50,000
	Paid In Capital in Excess of Par-Preferred stock		5,000
	(To record the issuance of preferred stock)
April 5	Cash (30,000 x $21)	630,000
	Common Stock, $10 Par		300,000
	Paid In Capital in Excess of Par-Common stock		330,000
	(To record the issuance of common stock)
December 31	Cash	150,000
	Service Revenue		150,000
	(To record the earned service revenue)
December 31	Operating Expenses	88,000
	Cash		88,000
	(To record the incurred operating expenses)
December 31	Dividends ($50 x 5% x 1,000)	2,500
	Dividends Payable		2,500
	(To record the declaration of dividend)
December 31	Service Revenue	150,000
	Retained Earnings		150,000
	(To close the revenue account)
December 31	Retained Earnings	88,000
	Operating Expenses		88,000
	(To close the expenses account)
December 31	Retained Earnings	2,500
	Dividends		2,500
	(To close the dividend account)

Table (1)

Date	Account Titles and Explanation	Debit	Credit
Year 2
February 15	Dividends Payable	2,500
	Cash		2,500
	(To record the payment of dividend)
March 3	Cash (15,000 x $53)	795,000
	Preferred Stock, $50 par		750,000
	Paid In Capital in Excess of Par-Preferred stock		45,000
	(To record the issuance of preferred stock)
May 5	Treasury Stock (Common) (900 x $24)	21,600
	Cash		21,600
	(To record the purchase of treasury stock)
December 31	Cash	210,000
	Service Revenue		210,000
	(To record the earned service revenue)
December 31	Operating Expenses	98,000
	Cash		98,000
	(To record the incurred operating expenses)
December 31	Dividends	57,550
	Dividends Payable		57,550
	(To record the declaration of dividend)
December 31	Service Revenue	210,000
	Retained Earnings		210,000
	(To close the revenue account)
December 31	Retained Earnings	98,000
	Operating Expenses		98,000
	(To close the expenses account)
December 31	Retained Earnings	57,550
	Dividends		57,550
	(To close the dividend account)

Table (2)

Post Year 1 journal entries to T-account.

Cash
Year 1
1/590,000	12/3188,000
1/1255,000
4/5630,000
12/31150,000
Bal.837,000

Dividends Payable
	Year 1
	12/31    2,500
	Bal.2,500

Retained Earnings
	Year 1
cl88,000	cl150,000
cl2,500
	Bal.59,500

Preferred Stock
	1/1250,000
	Bal.50,000

Common Stock
	1/560,000
	4/5300,000
	Bal.360,000

Paid in capital in Excess of Par Preferred stock
	1/125,000
	Bal.5,000

Paid in capital in Excess of Par Common stock
	1/530,000
	4/5330,000
	Bal.360,000

Dividends
12/312,500	cl.2,500
Bal.0

Service Revenue
cl.150,000	12/31150,000
	Bal.0

Operating Expenses
12/3188,000	cl.88,000
Bal.0

Post Year 2 journal entries to T-account.

Cash
Year 2
Bal.837,000	2/152,500
3/3795,000	5/521,600
12/31210,000	12/3198,000
Bal.1,719,900

Dividends Payable
	Year 2
	Bal.2,500
2/152,500	12/3157,550
	Bal.57,550

Retained Earnings
	Year 2
	Bal.59,500
cl98,000	cl210,000
cl57,550
	Bal.113,950

Preferred Stock
	Bal.50,000
	3/3750,000
	Bal.800,000

	Common Stock
		Bal.360,000

Paid in capital in Excess of Par Preferred stock
	Bal.5,000
	3/345,000
	Bal.50,000

Paid in capital in Excess of Par Common stock
	Bal.360,000

Dividends
12/3157,550	cl57,550
Bal.0

Treasury Stock
5/521,600
Bal.21,600

Service Revenue
cl210,000	12/31210,000
	Bal.0

Operating Expenses
12/3198,000	cl98,000
Bal.0

Working note:

Calculate the amount of cash dividend declared for preferred stock in Year 2.

$\begin{array}{c}\begin{array}{l}\text{Cash dividend declared}\\ \text{for preferred stock in Year 2}\end{array}\}=\left[\begin{array}{l}\text{Outstanding number of preferred shares}\times \\ \text{Percentage of dividend}\times \text{Par value per share}\end{array}\right]\\ =\left[\left(1,000+15,000\text{ shares}\right)\times 5\%\times \$50\right]\\ =\$40,000\end{array}$

Calculate the amount of cash dividend declared for common stock in Year 2.

$\begin{array}{c}\begin{array}{l}\text{Cash dividend declared}\\ \text{for common stock in Year 2}\end{array}\}=\left[\begin{array}{l}\text{Outstanding number of common shares}\times \\ \text{Amount of dividend declared}\end{array}\right]\\ =\left[\left(\begin{array}{l}6,000\text{ shares}\text{+}\text{30,000 shares }-\\ 900\text{shares}\end{array}\right)\times 0.50\right]\\ =\$17,550\end{array}$

Calculate the amount of total dividend declared in Year 2.

$\begin{array}{c}\text{Total dividend declared in Year 2 = }\left[\begin{array}{l}\text{Cash dividend declared for preferred stock in Year 2+}\\ \text{Cash dividend declared for common stock in Year 2}\end{array}\right]\\ =\$40,000+\$17,550\\ =\$57,550\end{array}$

b.

To determine

Prepare the balance sheet at December 31, Year 1 and Year 2.

Explanation of Solution

Prepare the balance sheet of Corporation S at December 31, Year 1 and Year 2.

Corporation S
Balance Sheet
As of December 31, Year 1
Assets	Amount	Amount
Cash	$837,000
Total Assets		$837,000
Liabilities and stockholders' equity
Liabilities:
Dividends Payable	$2,500
Total Liabilities		$2,500
Stockholders’ Equity:
Preferred Stock, $50 par value, 5%  cumulative, 50,000 shares authorized,  1,000 shares issued and outstanding	$50,000
Common Stock, $10 par value, 100,000 shares authorized, 36,000 shares issued and outstanding	360,000
Paid-In Capital in Excess of Par-Preferred Stock	5,000
Paid-In Capital in Excess of Par-Common Stock	360,000
Total Paid-In Capital	775,000
Retained Earnings	59,500
Total Stockholders’ Equity		834,500
Total Liabilities and Stockholders’ Equity		$837,000

Table (3)

Corporation S
Balance Sheet
As of December 31, Year 2
Assets	Amount	Amount
Cash	$1,719,900
Total Assets		$1,719,900
Liabilities and stockholders' equity
Liabilities:
Dividends Payable	$57,550
Total Liabilities		$57,550
Stockholders’ Equity:
Preferred Stock, $50 par value, 5%  cumulative, 50,000 shares authorized,  16,000 shares issued and outstanding	$800,000
Common Stock, $10 par value, 100,000 shares authorized, 36,000 shares issued and 35,100 outstanding	360,000
Paid-In Capital in Excess of Par-Preferred Stock	50,000
Paid-In Capital in Excess of Par-Common Stock	360,000
Total Paid-In Capital	1,570,000
Retained Earnings	113,950
Less: Treasury stock	(21,600)
Total Stockholders’ Equity		1,662,350
Total Liabilities and Stockholders’ Equity		$1,719,000

Table (4)

c.

To determine

Determine the number of shares outstanding at the end of Year 1 and Year 2.

Determine the number of shares had been issued at the end of Year 1 and Year 2.

Explain the differences between issued and outstanding common shares for Year 1 and for Year 2.

Explanation of Solution

Issued stock: It refers to the number of shares that are sold to the stockholders from number of shares authorized for issuance by the company.

Outstanding stock: It refers to the number of shares that are held by the existing stockholders of the company.

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.

Determine the number of shares has been issued and outstanding at the end of Year 1 and Year 2.

Schedule of Number of Shares of Common Stock
	Shares Issued	Shares Outstanding
Year 1
January 5	6,000	6,000
April 5	30,000	30,000
Totals	36,000	36,000
Year 2
May 5		-900
Totals	36,000	35,100

Table (5)

The number of shares outstanding at the end of Year 1 and Year 2 is 36,000 and 35,100 respectively.

The number of shares had been issued at the end of Year 1 and Year 2 is 36,000 and 36,000 respectively.

Shares issued and outstanding are the same for Year 1, since shares are not repurchased in Year 1.  But in Year 2, 900 shares of common shares are repurchased as treasury stock; this reduces the number of outstanding shares.  In Year 2, there are 36,000 shares issued but only 35,100 outstanding.