Chapter 11, Problem 2PSB

1.

Summary Introduction

Journal Entry

Journal entry isreferred as recording of monetary transactions that are related to the business in such a way that debit will be equal to the credit.

To determine: Preparation of Journal Entries for 2016.

Answer to Problem 2PSB

Net Income is equal to $1,072,000.

Explanation of Solution

Date	Account Title	Debit ($)	Credit ($)
10-Jan	Treasury stock   $(40,000\times 12)$	480,000
	……Cash   $(40,000\times 12)$		480,000
2-March	Retained Earnings   $\left[(200,000-40,000)\times 1.5\right]$	240,000
	…….Common Dividend Payable		240,000
31-March	Common Dividend Payable	240,000
	…….Cash		240,000
11-Nov.	Cash	312,000
	…….. Treasury stock		288,000
	……..Paid-in Capital in excess of par		24,000
25-Nov	Cash	152,000
	Paid-in Capital in excess of par	24,000
	Retained Earnings	16,000
	…….. Treasury stock		192,000
01-Dec	Retained Earnings   $(200,000\times 2.5)$	500,000
	……… Common Dividend Payable		500,000
01-Dec	Income Summary	1,072,000
	…….Retained Earnings		1,072,000

2.

Summary Introduction

Retained Earnings

Retained Earnings isreferred as an accumulated net income which is retained by the company at a particular point of time.

To Determine: Preparation of statement of Retained Earnings.

Answer to Problem 2PSB

Retained Earnings on December 31, 2016 is equal to 2,476,000.

Explanation of Solution

Statement of Retained Earnings

For the year ended December 31, 2016

Retained earnings, December 31, 2015	$2,160,000
Add: Net Income	$1,072,000
	$3,232,000
Less: Cash dividends declared (240,000 + 500,000)	($740,000)
Less: loss on sale of treasury stock	($16,000)
Retained earnings, December 31, 2016	$2,476,000

Working notes:

Purchase price of stock= 4000 × 12 = $480,000

Sale price of stock= (2,4000 × 13) + (16,000 × 9.5)

= 312,000 + 152,000

= $464,000

Loss on issue of treasury stock= $480,000 - $464,000 = $16,000

Summary Introduction

Stockholder’s Equity

Stockholder’s equity is also known as shareholder’s equity. Stockholder’s equity s one of the section of balance sheet. It can be calculating by rearranging the following equation:

Stockholder’s Equity = Assets - Liabilities

To determine: Preparation of stockholder’s equity section of balance sheet.

Answer to Problem 2PSB

Total stockholder’s equity is equal to $4,076,000.

Explanation of Solution

      Stockholder’s Equity Section of the balance sheet

      For the year ended December 31, 2016

Common Stock
Authorized 320,000 shares @$1 par
Issued 200,000 shares and outstanding
200,000 shares	200,000
Paid-in capital in excess of par value, common stock	1,400,000
Total contribution	1,600,000
Retained Earnings	$2,476,000
Shareholder’s Equity, December 31, 2016	$4,076,000