Chapter 11, Problem 27BP

a)

To determine

Record the given events in a horizontal statements model. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA to indicate that an element is not affected by the event.

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.

$\text{Assets = Liabilities + Stockholders' Equity}$

Record the given events in a horizontal statements model.

Table (1)

Note:

1. 1) In the Event 5, Corporation B issued 2 for 1 split on the shares of outstanding common stock. There is no financial transaction is taken place. There is an increase in number of shares issued and outstanding but no effect on the amount. Thus, this event will not affect the balance sheet, income statement, and statement of cash flows.
2. 2) Event 7 is refers about the closing entries, thus, it does not affect the balance sheet, income statement, and statement of cash flows.
3. 3) PIC stands for paid-in-capital.

Working note:

Calculate the cash dividend amount for 5% preferred stock, $100 par.

Corporation B issued 6,000 shares of $100 par, 5% preferred stock. Dividend on one preferred stock is $5$\left(\$100\times 5\%\right)$. Hence, the cash dividend for the 6,000 shares of preferred stock is $30,000$\left(\$5\times 6,000\text{shares}\right)$. (1)

Calculate the stock dividend:

Corporation B issued 30,000 shares no par common stock. 5% of the stock dividend issued on no par common stock. On the date of dividend declaration market price per share is $19.

$\begin{array}{c}\text{Stock dividend = 5\% of no-par Common stock}\\ \text{= 30,000 }\times 5\text{\%}\\ \text{=}1\text{,500 shares}\end{array}$

Therefore 1,500 shares are issued as a stock dividend.

On the date of dividend declaration market price per share is $19. The amount of stock dividend is recorded in the balance sheet is $28,500 $\left(\text{1,500}\text{shares}\text{×}\text{\$19}\right)$ (2)

b)

To determine

Record the year 1 transactions in general journal form and post them to T-accounts.

Explanation of Solution

Record the year 1 transactions in general journal form.

Date	Account Titles and Explanation	Post ref.	Debit ($)	Credit ($)
1.	Cash $\left(30,000\times \$15\right)$		450,000
	Common Stock, No Par			300,000
	Paid-in-capital in excess of par, common stock			150,000
	(To record issue of common stock )
2.	Cash $\left(6,000\times \$101\right)$		606,000
	Preferred Stock, $20 Par			600,000
	Paid-in-capital in excess of par, preferred stock			6,000
	(To record issue of preferred stock)
3.	Dividends (1)		30,000
	Cash			30,00
	(To record cash dividend)
4.	Retained Earnings (2)		28,500
	Common Stock, No Par			15,000
	Paid-in-capital in excess of par, common stock			13,500
	(To record stock dividend)
5.	No journal entry (no financial transaction) (refer note 1)
6a.	Cash		165,000
	Service Revenue			165,000
	(To record service revenue)
6b.	Operating Expenses		98,000
	Cash			98,000
	(To record operating expense)
7.	Service Revenue		165,000
	Operating Expenses			98,000
	Dividends			30,000
	Retained Earnings			37,000
	(To record closing entries for service revenue, operating expenses, and dividends)

Table (2)

Post the journal entries to T-accounts.

Cash
Beginning Balance	0
1	450,000	3.	30,000
2	606,000	6b.	98,000
6a.	165,000
Ending Balance	1,093,000

	Retained earnings
4.		28,500	7.	37,000
			Ending Balance	8,500

Preferred stock
		2.	600,000
		Ending Balance	600,000

Common stock
		1.	300,000
		4.	15,000
		Ending Balance	315,000

Paid-in-capital in excess of par, preferred stock
		2.	6,000
		Ending Balance	6,000
Paid-in-capital in excess of par, common stock
		1.	150,000
		4.	13,500
		Ending Balance	163,500

Dividends
3.	30,000	7.	30,000
Ending Balance	0

Service revenue
7.	165,000	6a.	165,000
		Ending Balance	0

Operating expenses
6b.	98,000	7.	98,000
Ending Balance	0

c)

To determine

Prepare the stockholders’ equity section of the balance sheet at the end of Year 1.

Explanation of Solution

Stockholders’ equity:

The claims of owners on a company’s resources, after the liabilities are paid off, are referred to as stockholders’ equity. Two main components of stockholders’ equity are paid-in capital and retained earnings.

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.

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.

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.

Retained earnings: Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth. In other words, Accumulated amount of all net income less the accumulated amount of dividends declared till date is known as retained earnings.

Prepare the stockholders’ equity section of the balance sheet at the end of Year 1.

Particulars	Amount ($)	Amount ($)
Stockholders’ Equity
Preferred Stock, $100 par value, 5%, 6,000 shares issued and outstanding	$600,000
Common Stock, no par value, 63,000 shares issued and outstanding	315,000
Paid-in-capital in excess of par, preferred stock	6,000
Paid-in-capital in excess of par, common stock	163,500
Total Paid-In Capital		$1,084,500
Retained Earnings		8,500
Total Stockholders’ Equity		$1,093,000

Table (3)

Therefore, at the end of the Year 1, Corporation B’s total stockholders’ equity is $1,093,000.