Chapter 11, Problem 25BP

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 2	Cash (25,000 x $10)	250,000
	Common Stock (25,000 x $8)		200,000
	Paid In Capital in Excess of Par-Common stock		50,000
	(To record the issuance of common stock)
January 15	Cash (2,000 x $90)	180,000
	Preferred Stock (2,000 x $80)		160,000
	Paid In Capital in Excess of Par-Preferred stock		20,000
	(To record the issuance of preferred stock)
February 14	Cash (20,000 x $12)	240,000
	Common Stock (2,000 x $8)		160,000
	Paid In Capital in Excess of Par-Common stock		80,000
	(To record the issuance of common stock)
December 31	Cash	280,000
	Service Revenue		280,000
	(To record the earned service revenue)
December 31	Operating Expenses	165,000
	Cash		165,000
	(To record the incurred operating expenses)
December 31	Dividends ($80 x 4% x 2,000)	6,400
	Dividends Payable		6,400
	(To record the declaration of dividend)
December 31	Service Revenue	280,000
	Retained Earnings		280,000
	(To close the revenue account)
December 31	Retained Earnings	165,000
	Operating Expenses		165,000
	(To close the expenses account)
December 31	Retained Earnings	6,400
	Dividends		6,400
	(To close the dividend account)

Table (1)

Date	Account Titles and Explanation	Debit	Credit
Year 2
January 31	Dividends Payable	6,400
	Cash		6,400
	(To record the payment of dividend)
March 1	Cash (4,000 x $92)	368,000
	Preferred Stock, $80 par		320,000
	Paid In Capital in Excess of Par-Preferred stock		48,000
	(To record the issuance of preferred stock)
June 1	Treasury Stock (Common) (1,000 x $14)	14,000
	Cash		14,000
	(To record the purchase of treasury stock)
December 31	Cash	185,000
	Service Revenue		185,000
	(To record the earned service revenue)
December 31	Operating Expenses	110,000
	Cash		110,000
	(To record the incurred operating expenses)
December 31	Dividends	63,200
	Dividends Payable		63,200
	(To record the declaration of dividend)
December 31	Service Revenue	185,000
	Retained Earnings		185,000
	(To close the revenue account)
December 31	Retained Earnings	110,000
	Operating Expenses		110,000
	(To close the expenses account)
December 31	Retained Earnings	63,200
	Dividends		63,200
	(To close the dividend account)

Table (2)

Post Year 1 journal entries to T-account.

Cash
Year 1
1/2250,000	12/31165,000
1/15180,000
2/14240,000
12/31280,000
Bal.785,000

Dividends Payable
	Year 1
	12/31    6,400
	Bal.6,400

Retained Earnings
	Year 1
cl165,000	cl280,000
cl6,400
	Bal.108,600

Preferred Stock
	1/15160,000
	Bal.160,000

Common Stock
	1/2200,000
	2/14160,000
	Bal.360,000

Paid in capital in Excess of Par Preferred stock
	1/1520,000
	Bal.20,000

Paid in capital in Excess of Par Common stock
	1/250,000
	2/1480,000
	Bal.130,000

Dividends
12/316,400	cl.6,400
Bal.0

Service Revenue
cl.280,000	12/31280,000
	Bal.0

Operating Expenses
12/31165,000	cl.165,000
Bal.0

Post Year 2 journal entries to T-account.

Cash
Year 2
Bal.785,000	1/316,400
3/1368,000	6/114,000
12/31185,000	12/31110,000
Bal.1,207,600

Dividends Payable
	Year 2
	Bal.6,400
1/316,400	12/3163,200
	Bal.63,200

Retained Earnings
	Year 2
	Bal.108,600
cl110,000	cl185,000
cl63,200
	Bal.120,400

Preferred Stock
	Bal.160,000
	3/1320,000
	Bal.480,000

	Common Stock
		Bal.360,000

Paid in capital in Excess of Par Preferred stock
	Bal.20,000
	3/148,000
	Bal.68,000

Paid in capital in Excess of Par Common stock
	Bal.130,000

Dividends
12/3163,200	cl63,200
Bal.0

Treasury Stock
6/114,000
Bal.14,000

Service Revenue
cl185,000	12/31185,000
	Bal.0

Operating Expenses
12/31110,000	cl110,000
Bal.0

Working note:

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

$\begin{array}{c}\begin{array}{l}\text{Cash dividend declared}\\ \text{for preferred stock in Year 2}\end{array}\}=\left[\begin{array}{l}\text{Outstanding number of preferred shares}\times \\ \text{Percentage of dividend}\times \text{Par value per share}\end{array}\right]\\ =\left[\left(2,000+4,000\text{ shares}\right)\times 4\%\times \$80\right]\\ =\$19,200\end{array}$

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

$\begin{array}{c}\begin{array}{l}\text{Cash dividend declared}\\ \text{for common stock in Year 2}\end{array}\}=\left[\begin{array}{l}\text{Outstanding number of common shares}\times \\ \text{Amount of dividend declared}\end{array}\right]\\ =\left[\left(\begin{array}{l}25,000\text{ shares}\text{+}2\text{0,000 shares }-\\ 1,000\text{shares}\end{array}\right)\times 1\right]\\ =\$44,000\end{array}$

Calculate the amount of total dividend declared in Year 2.

$\begin{array}{c}\text{Total dividend declared in Year 2 = }\left[\begin{array}{l}\text{Cash dividend declared for preferred stock in Year 2+}\\ \text{Cash dividend declared for common stock in Year 2}\end{array}\right]\\ =\$19,200+\$44,000\\ =\$63,200\end{array}$

b.

To determine

Prepare the stockholders’ equity section of the balance sheet at December 31, Year 1.

Explanation of Solution

Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance of each stockholder’s equity account as on reported date at the end of the financial year.

Prepare the stockholders’ equity section of the balance sheet at December 31, Year 1.

Corporation E
Balance Sheet
As of December 31, Year 1
Stockholders’ Equity:
Preferred Stock, $80 par value, 4%  cumulative, 50,000 shares authorized,  2,000 shares issued and outstanding	$160,000
Common Stock, $8 par value, 100,000 shares authorized, 45,000 shares issued and outstanding	360,000
Paid-In Capital in Excess of Par-Preferred Stock	20,000
Paid-In Capital in Excess of Par-Common Stock	130,000
Total Paid-In Capital	670,000
Retained Earnings	108,600
Total Stockholders’ Equity		$778,600

Table (3)

c.

To determine

Prepare the balance sheet at December 31, 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 common 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 2	25,000	25,000
February 14	20,000	20,000
Totals	45,000	45,000
Year 2
June 1		-1,000
Totals	45,000	44,000

Table (4)

Now, prepare the balance sheet at December 31, Year 2.

Corporation S
Balance Sheet
As of December 31, Year 2
Assets	Amount	Amount
Cash	$1,207,600
Total Assets		$1,207,600
Liabilities and stockholders' equity
Liabilities:
Dividends Payable	$63,200
Total Liabilities		$63,200
Stockholders’ Equity:
Preferred Stock, $80 par value, 4%  cumulative, 50,000 shares authorized,  6,000 shares issued and outstanding	$480,000
Common Stock, $8 par value, 100,000 shares authorized, 45,000 shares issued and 44,000 outstanding	360,000
Paid-In Capital in Excess of Par-Preferred Stock	68,000
Paid-In Capital in Excess of Par-Common Stock	130,000
Total Paid-In Capital	1,038,000
Retained Earnings	120,400
Less: Treasury stock	(14,000)
Total Stockholders’ Equity		1,144,400
Total Liabilities and Stockholders’ Equity		$1,207,600

Table (5)