Chapter 11, Problem 28AP

a.

To determine

Prepare the journal entries for the given transactions, and post to the T-accounts.

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:

1. (a) The title of the account
2. (b) The left or debit side
3. (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.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Issued value of common stock}\\ \text{= 20,000 shares × \$10}\\ \text{= \$200,000}\end{array}$ (1)

2. Issuance of 3,000 preferred shares at $20 par

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

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Issued value of preferred stock}\\ \text{= 3,000 shares × \$20}\\ \text{= \$60,000}\end{array}$ (2)

3. Purchased 1,000 shares of common stock as treasury stock for $12 per share:

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:

$\begin{array}{c}\text{Treasury stock = }\left[\begin{array}{l}\text{Number of repurchase shares}\times \\ \text{ Value of per share}\end{array}\right]\\ \text{=1,000}\times \text{\$12 per share}\\ \text{=\$12,000}\end{array}$ (3)

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.

$\begin{array}{c}\text{Cash received = Number of resold shares }\times \text{ Selling price per share}\\ \text{= 500 shares × \$14}\\ \text{= \$7,000}\end{array}$ (4)

Calculate the value of treasury stock resold at original cost

$\begin{array}{c}\text{Treasury stock = Number of resold shares }\times \text{ Original cost per share}\\ \text{= 500 shares × \$12}\\ \text{= \$6,000}\end{array}$ (5)

Calculate the value of paid-in capital in excess of cost, TS.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of cost}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received }\left(4\right)\text{–}\\ \text{Common stock value }\left(5\right)\end{array}\right)\\ \text{= \$7,00}0\text{ – \$6,000}\\ \text{= \$1,000}\end{array}$ (6)

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.

To determine

Prepare the balance sheet as of December 31, Year 1.

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.