Chapter 11, Problem 2AP

a.

To determine

Prepare the journal entries to record the given transactions.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

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.

Prepare the journal entries to record the given transactions as follows:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
April, 1	Cash (1)		$1,600,000
	Common stock (2)			$400,000
	Paid-in capital in excess of par value (3)			$1,200,000
	(To record issuance of 80,000, $5 par  value common stock issued at $20 per stock)

Table (1)

• Cash is an asset and it increases the value of assets by $1,600,000. Therefore debit cash account by $1,600,000.
• Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 400,000.
• Paid-in capital in excess of par-common is a component of stockholders’ equity and it is increased. Therefore credit paid-in capital in excess of par-common account by $1,200,000.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
April, 3	Service account (attorneys’ and promotions)		$31,000
	Common stock (4)			$10,000
	Paid-in capital in excess of par value (5)			$21,000
	(To record 2,000, $5 par value common stock issued at $15.5 per stock)

Table (2)

• Service account is an asset and it increases the value of assets by $31,000. Therefore debit service account by $31,000.
• Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 10,000
• Paid-in capital in excess of par-common is a component of stockholders’ equity and it is increased. Therefore credit paid-in capital in excess of par-common account by $21,000

Date	Account Title and Explanation	Post Ref.	Debit	Credit
April, 8	Equipment		$55,000
	Common stock (6)			$15,000
	Paid-in capital in excess of par value (7)			$40,000
	(To record 3,000, $5 par value common stock issued at $18.33 per stock)

Table (3)

• Equipment is an asset and it increases the value of assets by $55,000. Therefore debit equipment account by $55,000.
• Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 15,000
• Paid-in capital in excess of par-common is a component of stockholders’ equity and it is increased. Therefore credit paid-in capital in excess of par-common account by $40,000

Date	Account Title and Explanation	Post Ref.	Debit	Credit
April, 20	Cash (8)		$360,000
	Preferred stock (9)			$300,000
	Paid-in capital in excess of par value (10)			$60,000
	(To record 6,000, $50 par value preferred stock issued at $55 per stock)

Table (4)

• Cash is an asset and it increases the value of assets by $360,000. Therefore debit cash account by $360,000.
• Preferred stock is a component of stockholders’ equity and it is increased. Therefore credit preferred stock account by $ 300,000.
• Paid-in capital in excess of par-common is a component of stockholders’ equity and it is increased. Therefore credit paid-in capital in excess of par-common account by $60,000.

Working notes:

Calculate the cash received through issuance of shares (par common stock)

$\begin{array}{c}\text{Cash received}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{per}\text{share}\\ \text{=}8\text{0,000 shares}\text{×}\text{\$20}\\ \text{= \$1,600,000}\end{array}$ (1)

Calculate the value of common stock

$\begin{array}{c}\text{Common}\text{stock}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{of}\text{each}\text{share}\\ \text{=}80,0\text{00 shares}\text{×}\text{\$5}\\ \text{=}\text{\$400,000}\end{array}$ (2)

Calculate the value of paid-in capital in excess of par-common

$\begin{array}{c}\text{Paid-in}\text{capital}\text{in}\text{excess}\text{of}\text{par-Common}\text{=}\text{Cash received}-\text{Common}\text{stock}\\ \text{=}\text{\$1,600,000 (1)}-\text{\$400,000(2)}\\ \text{=}\text{\$1,200,000}\end{array}$ (3)

Calculate the value of common stock

$\begin{array}{c}\text{Common}\text{stock}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{of}\text{each}\text{share}\\ \text{=}2,0\text{00 shares}\text{×}\text{\$5}\\ \text{=}\text{\$10,000}\end{array}$ (4)

Calculate the value of paid-in capital in excess of par-common

$\begin{array}{c}\text{Paid-in}\text{capital}\text{in}\text{excess}\text{of}\text{par-Common}\text{=}\text{Service value}-\text{Common}\text{stock}\\ \text{=}\text{\$31,000}-\text{\$10,000 (4)}\\ \text{=}\text{\$21,000}\end{array}$ (5)

Calculate the value of common stock

$\begin{array}{c}\text{Common}\text{stock}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{of}\text{each}\text{share}\\ \text{=}3,0\text{00 shares}\text{×}\text{\$5}\\ \text{=}\text{\$15,000}\end{array}$ (6)

Calculate the value of paid-in capital in excess of par-common

$\begin{array}{c}\text{Paid-in}\text{capital}\text{in}\text{excess}\text{of}\text{par-Common}\text{=Equipment value}-\text{Common}\text{stock}\\ \text{=}\text{\$55,000}-\text{\$15,000 (6)}\\ \text{=}\text{\$40,000}\end{array}$ (7)

Calculate the cash received through issuance of shares (par preferred stock)

$\begin{array}{c}\text{Cash received}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{per}\text{share}\\ \text{=}6\text{,000shares}\text{×}\text{\$60}\\ \text{= \$360,000}\end{array}$ (8)

Calculate the value of preferred stock

$\begin{array}{c}\text{Preferred stock}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{of}\text{each}\text{share}\\ \text{=}6,0\text{00 shares}\text{×}\text{\$50}\\ \text{=}\text{\$300,000}\end{array}$ (9)

Calculate the value of paid-in capital in excess of par-Preferred stock

$\begin{array}{c}\begin{array}{l}\text{Paid-in}\text{capital}\text{in}\text{excess}\text{of}\\ \text{par-Preferred stock}\end{array}\}\text{=}\text{Cash received}-\text{Common}\text{stock}\\ \text{=}\text{\$360,000 (8)}-\text{\$300,000 (9)}\\ \text{=}\text{\$60,000}\end{array}$ (10)

b.

To determine

Prepare the stockholders’ equity section of the balance sheet at April 30.

Explanation of Solution

Statement of stockholder’ equity:

This statement reports the beginning stockholders’ equity and all the changes, which led to ending stockholders’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning stockholders’ equity to arrive at the result, ending stockholders’ equity.

Prepare the stockholders’ equity section of the balance sheet at April 30 as follows:

Company T Statement of Stockholders' Equity For Year Ended April 30
Particulars	Common stock	Capital in excess of par value	Capital from treasury stock	Retained earnings	Treasury stock	Total
Opening balance						$0
80,000 common shares issued	$400,000	$1,200,000				$1,600,000
2,000 common shares issued	$10,000	$21,000				$31,000
3,000 common shares issued	$15,000	$40,000				$55,000
6,000 preferred shares issued	$300,000	$60,000				$360,000
Net income				$51,000		$51,000
Cash dividend declared						$0
Treasury stock repurchased						$0
Closing balance						XXX
	$725,000	$1,311,000	$0	$51,000	$0	$2,097,000

Table (5)

Therefore, the ending balance of stockholder’s equity is $2,097,000.