
a.
Prepare the
a.

Explanation of Solution
Journal:
Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.
T-account:
T-account refers to an individual account, where the increase or decrease in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.
This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:
- (a) The title of the account
- (b) The left or debit side
- (c) The right or credit side
Prepare the journal entries for the given transactions, and post to the T-accounts as follows:
1. Issuance of common stock at $10 par
Date | Account Titles | Debit ($) | Credit ($) |
Cash (1) | 200,000 | ||
Common Stock, $10 par | 200,000 | ||
(To record the issuance of common stock) |
Table (1)
- Cash is an asset account, and it increases the value of cash account by $200,000. Therefore, debit cash account for $200,000.
- Common Stock is a component of
stockholders’ equity and it increases the value of common stock by $200,000. Therefore, credit common Stock account for $200,000.
Working note:
Calculate the value of cash received from the issuance of common stock.
2. Issuance of 3,000
Date | Account Titles | Debit ($) | Credit ($) |
Cash (2) | 60,000 | ||
Preferred Stock, $20 stated value | 60,000 | ||
(To record the issuance of preferred stock) |
Table (2)
- Cash is an asset account, and it increases the value of cash account by $60,000. Therefore, debit cash account for $60,000.
- Preferred Stock is a component of stockholders’ equity and it increases the value of common stock by $60,000. Therefore, credit preferred Stock account for $60,000.
Working note:
Calculate the value of cash received from the issuance of preferred stock
3. Purchased 1,000 shares of common stock as
Date | Account Titles | Debit ($) | Credit ($) |
Treasury Stock (Common Stock) (3) | 12,000 | ||
Cash | 12,000 | ||
(To record purchase of treasury stock) |
Table (3)
- Treasury stock is contra-stockholders’ equity account with a normal balance of debit. Thus, when treasury stocks are purchased, it decreases the stockholders’ equity account. In this case, it reduces the stockholders’ equity by $12,000. Therefore, treasury stock account is debited with $12,000.
- Cash is an asset account, and it decreases the value of cash account by $12,000. Therefore, credit cash account for $12,000.
Working note:
Calculate the value of treasury stock:
4. Declared a $2,000 cash dividends on preferred stock
Date | Account Titles | Debit ($) | Credit ($) |
Dividends | 2,000 | ||
Dividends Payable | 2,000 | ||
(To record dividends declared to the shareholders) |
Table (4)
- Dividends are a component of stockholder’s and it decreases the value of
retained earnings by $2,000. Hence, debit the dividends account for $2,000. - Dividends payable is a liability account and it increases the value of liability by $2,000. Hence, credit the dividends payable for $2,000.
5. Sold 500 share of treasury stock for $14 per share
Date | Account Titles | Debit ($) | Credit ($) |
Cash (4) | 7,000 | ||
Treasury Stock (5) | 6,000 | ||
Paid in capital in excess of Cost-TS (6) | 1,000 | ||
(To record sale of treasury stock for above the cost price) |
Table (5)
- Cash is an asset account, and it increases the value of cash account by $7,000. Therefore, debit cash account for $7,000.
- Treasury stock is contra-stockholders’ equity account with a normal balance of debit. Thus, when treasury stocks are sold at its cost price, then cash would be debited and treasury stock would be credited. But, when treasury stocks are sold for higher than its cost price, then cash would be debited and treasury stock would be credited for cost price, and paid-in capital from treasury stock would be credited for excess selling price.
Working note:
Calculate the value of cash received from the resold of treasury stock.
Calculate the value of treasury stock resold at original cost
Calculate the value of paid-in capital in excess of cost, TS.
6. Dividends paid to shareholders
Date | Account Titles | Debit ($) | Credit ($) |
Dividends Payable | 2,000 | ||
Cash | 2,000 | ||
(To record dividends paid to shareholders) |
Table (6)
- Dividends payable is a liability account and it decreases the value of liability by $2,000. Hence, debit the dividends payable for $2,000.
- Cash is an assets account and it decreases the value of asset by $2,000. Hence, credit the cash account for $2,000.
7. Earned cash revenues of $78,000 incurred cash expenses of $41,000
Date | Account Titles | Debit ($) | Credit ($) |
Cash | 78,000 | ||
Service Revenue | 78,000 | ||
(To record service revenue received from customers) |
Table (7)
- Cash is an asset account, and it increases the value of cash account by $78,000. Therefore, debit cash account for $78,000.
- Service revenue is a component of stockholder’s equity, and it decreases the value of stockholder’s equity by $78,000. Therefore, credit the service revenue account for $78,000
Date | Account Titles | Debit ($) | Credit ($) |
Operating Expenses | 41,000 | ||
Cash | 41,000 | ||
(To record the cash paid to operating expense) |
Table (8)
- Operating expense is an expense account, and it decreases the value of stockholder’s equity by $41,000. Hence, debit the dividends account for $41,000.
- Cash is an assets account and it decreased the value of asset by $41,000. Hence, credit the cash account for $41,000.
8. Close revenue, expense, and dividends accounts
Date | Account Titles | Debit ($) | Credit ($) |
Service Revenue | 78,000 | ||
Retained Earnings | 78,000 | ||
(To close service revenue account) | |||
Retained Earnings | 41,000 | ||
Operating Expenses | 41,000 | ||
(To close operating expense account) | |||
Retained Earnings | 2,000 | ||
Dividends | 2,000 | ||
(To close dividends account) |
Table (9)
Closing entry for revenue account:
In this closing entry, the service revenue is closed by transferring the amount of service revenue accounts to retained earnings in order to bring the revenue account balance to zero. Hence, debit the service revenue account for $78,000, and credit the retained account for $78,000.
Closing entry for expenses account:
In this closing entry, operating expense accounts is closed by transferring the amount of operating expense to the retained earnings in order to bring the expense account balance to zero. Hence, debit the retained earnings for $41,000 and credit operating expense account for $41,000.
Closing entry for dividends account:
In this closing entry, the dividends account is closed by transferring the amount of dividends to retained earnings in order to bring the dividends account balance to zero. Hence, debit the retained earnings for $2,000 and credit dividends account for $2,000.
9. Appropriated $8,000 of retained earnings
Date | Account Titles | Debit ($) | Credit ($) |
Retained Earnings | 8,000 | ||
Appropriated Retained Earnings | 8,000 | ||
(To close appropriate retained earnings account) |
Table (10)
T-accounts:
Cash | |
1. 200,000 | 3. 12,000 |
2. 60,000 | 6. 2,000 |
5. 7,000 | 7. 41,000 |
7. 78,000 | |
Bal. 290,000 |
Dividends Payable | |
6. 2,000 | 4. 2,000 |
Bal. 0 |
Retained Earnings | |
cl 8. 43,000 | cl 8 78,000 |
cl 9. 8,000 | |
Bal. 27,000 |
Appropriated Retained Earnings | |
cl 9. 8,000 | |
Bal. 8,000 |
Preferred Stock | |
2. 60,000 | |
Bal. 60,000 |
Common Stock | |
1. 200,000 | |
Bal. 200,000 |
Paid in capital excess of Cost Treasury stock | |
5. 1,000 | |
Bal. 1,000 |
Treasury Stock | |
3. 12,000 | 5. 6,000 |
Bal. 6,000 |
Dividends | |
4. 2,000 | cl 8. 2,000 |
Bal. 0 |
Service Revenue | |
cl 8. 78,000 | 7. 78,000 |
Bal. 0 |
Operating Expenses | |
7. 41,000 | cl 8. 41,000 |
Bal. 0 |
b.
Prepare the
b.

Explanation of Solution
Balance Sheet:
Balance sheet summarizes the assets, the liabilities, and the stockholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Prepare the balance sheet as of December 31, Year 1 as follows:
Company C | ||
Balance Sheet | ||
As of December 31,Year 1 | ||
$ | $ | |
Assets | ||
Cash | 290,000 | |
Total Assets | 290,000 | |
Liabilities and stockholder's equity | ||
Liabilities | - | |
Stockholders’ Equity | ||
Preferred Stock, $20 stated value, 3,000 shares issued and outstanding | 60,000 | |
Common Stock, $10 par value, 20,000 shares issued and 19,500 shares outstanding | 200,000 | |
Paid-In Capital in Excess of Cost-Treasury Stock | 1,000 | |
Total Paid-In Capital | 261,000 | |
Retained Earnings | ||
Appropriated | 8,000 | |
Unappropriated | 27,000 | |
Total Retained Earnings | 35,000 | |
Less: Treasury Stock (500 shares) | (6,000) | |
Total Liabilities and Stockholders’ Equity | 290,000 |
Table (11)
Therefore, the total assets of Company C are $290,000, and the total liabilities and stockholders’ equity is $290,000.
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