Chapter 11, Problem 9BP

To determine

Prepare the stockholder’s equity section of Company X on December 31.

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 stockholder’s equity section of Company X on December 31 as follows:

Company X Equity section on December 31
Particulars	Amount	Amount
Paid-in capital:
Common stock, $2 per value, authorized shrares is 100,000 and issued 57,500 shares (16)	$182,000
Preferred stock, $100 per value, authorized shrares is 20,000 and issued 6,200 shares (15)	$420,000
1,000 shares in treasury reissued (13)	$10,000
Capital from treasury stock (18)	$1,500
Paid-in capital in excess of par value-common stock (17)	$988,000
Paid-in capital in excess of par value-preferred stock (18)	420,000
Total paid-in capital		$2,021,500
Retained earnings (19)		$975,000
Less: Treasury stock (9,500 shares) at cost (20)		$190,000
Total stockholders’ equity		$2,806,500

Table (1)

Working note:

Journal entries:

January 1 – Announced a 2 for 1 common stock split, reducing the par value of the common stock to $2.00 per share

Stock split increases the number of shares and reduces the par value per share. Hence, the common stock account balance should not change for this stock split.

Working note:

Calculate the value of number of stocks issued and outstanding after the stock split

$\begin{array}{c}\begin{array}{l}\text{Number of stocks}\\ \text{issued and outstanding}\end{array}\}=\frac{\text{40,000}}{\text{1 stock}}\times 2\text{ stocks}\\ =80,000\text{ stocks}\end{array}$ (1)

March 31 – Conversion of common stock into bonds

Date	Account Title and Explanation	Post Ref.	Debit	Credit
Mar, 31	Bonds - par value		$100,000
	Common stock - par value (3)			$12,000
	Paid-in capital in excess of par value –common stock $\left(\$100,000-\$12,500\right)$			$88,000
	(To record conversion of 100 bonds into common stocks)

Table (1)

• Bond is a liability account and it decreases the value of liabilities by $100,000. Therefore debit bond account by $100,000.
• Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 12,000
• 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 $88,000

Working note:

Calculate the number of bonds converted:

$\begin{array}{c}\text{Number of bonds converted}=\left(\frac{\text{Total face value of the bonds}}{\text{Face value of one bond}}\right)\\ =\frac{\text{\$100,000}}{\text{\$1,000}}\\ =10\text{0 bonds}\end{array}$ (2)

Calculate the value of common stock:

$\begin{array}{c}\text{Common stock par value}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Number of common stock per bonds}\\ \text{Par value of common stock}\end{array}\right)\\ \text{Number of bonds}\end{array}\right)\\ =\left(\text{120}\times \text{\$1}\right)\times 10\text{0}\\ =\$12,000\end{array}$ (3)

June 1 – Acquired equipment with a fair market value of $30,000 in exchange for $200 shares of preferred stock

Date	Account Title and Explanation	Post Ref.	Debit	Credit
June, 1	Equipment		$40,000
	Preferred stock (6)			$20,000
	Paid-in capital in excess of par value –Preferred stock(7)			$20,000
	(To record 200, $100 par value preferred stock issued at $150 per stock)

Table (2)

• Equipment is an asset and it increases the value of assets by $40,000. Therefore debit equipment account by $40,000.
• Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $20,000
• 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 $20,000

Working note:

Calculation of preferred stock issue value:

$\begin{array}{c}\text{Stock issue value}=\frac{\text{Equipment value}}{\text{Number of shares issued}}\\ =\frac{\text{\$40,000}}{\text{200 shares}}\\ =\text{\$200}\end{array}$ (4)

Calculation of paid-in capital in excess of par value per share:

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital}\\ \text{in excess of par}\\ \text{value of per share}\end{array}\}=\text{Stock issue value}-\text{Par value}\\ =\text{\$200}-\text{\$100}\\ =\text{\$100}\end{array}$ (5)

Calculate the value of preferred stock:

$\begin{array}{c}\text{Preferreds}\text{stock}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{of}\text{each}\text{share}\\ \text{=}2\text{00 shares}\text{×}\text{\$100}\\ \text{=}\text{\$20,000}\end{array}$ (6)

Calculate the value of paid-in capital in excess of preferred stock

$\begin{array}{c}\text{Paid-in}\text{capital}\text{in}\text{excess}\text{of}\text{par-Common}\text{=Equipment value}-\text{Preferred}\text{stock}\\ \text{=}\$40\text{,000}-\text{\$20,000 (6)}\\ \text{=}\text{\$20,000}\end{array}$ (7)

September 1 – Acquired 10,000 shares of common stock for cash at $20 per share

Date	Account Title and Explanation	Post Ref.	Debit	Credit
Sep, 1	Treasury stock (8)		$200,000
	Cash			$200,000
	(To record purchase of 10,000 shares of treasury stock at $20 per share)

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 $200,000. Therefore, treasury stock account is debited with $200,000.
• Cash is an asset account, and it decreases the value of cash account by $200,000. Therefore, credit cash account for $200,000.

Working note:

Calculate the value of treasury stock:

$\begin{array}{c}\text{Treasury stock = }\left[\begin{array}{l}\text{Number of repurchase shares}\times \\ \text{ Value of per share}\end{array}\right]\\ \text{=10,000}\times \text{\$20 per share}\\ \text{=\$200,000}\end{array}$ (8)

November 21 – Issued 5,000 shares of common stock at $22 cash per share

Date	Account Title and Explanation	Post Ref.	Debit	Credit
Nov, 21	Cash (13)		$110,000
	Common stock (14)			$10,00
	Paid-in capital in excess of par value-common stock(15)			$100,000
	(To record 5,000, $0.50 par value common stock issued at $22 per stock)

Table (5)

• Cash is an asset and it increases the value of assets by $110,000. Therefore debit cash account by $110,000.
• 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 $100,000.

Working notes:

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

$\begin{array}{c}\text{Cash received}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{per}\text{share}\\ \text{=}5\text{,000 shares}\text{×}\text{\$22}\\ \text{= \$110,000}\end{array}$ (9)

Calculate the value of common stock

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

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

$\begin{array}{c}\text{Paid-in}\text{capital}\text{in}\text{excess}\text{of}\text{par-Common}\text{=}\text{Cash received}-\text{Common}\text{stock}\\ \text{=}\text{\$110,000 (9)}-\text{\$10,000(10)}\\ \text{=}\$100\text{,000}\end{array}$ (11)

December 28 – Sold 500 treasury shares at $23 per share

Date	Account Title and Explanation	Post Ref.	Debit	Credit
Dec, 28	Cash (12)		$11,500
	Treasury stock (13)			$10,000
	Paid-in capital - Treasury stock (14)			$1,500
	(To record 500, $20 par value treasury stock issued at $23 per stock)

Table (6)

• Cash is an asset account, and it increases the value of cash account by $11,500. Therefore, debit cash account for $11,500.
• 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.

$\begin{array}{c}\text{Cash received = Number of resold shares }\times \text{ Selling price per share}\\ \text{= 500 shares × \$23}\\ \text{= \$11,500}\end{array}$ (12)

Calculate the value of treasury stock resold at original cost

$\begin{array}{c}\text{Treasury stock = Number of resold shares }\times \text{ Original cost per share}\\ \text{= 500 shares × \$20}\\ \text{= \$10,000}\end{array}$ (13)

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

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{lesser of cost}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received }\left(12\right)\text{–}\\ \text{Common stock value }\left(13\right)\end{array}\right)\\ \text{= \$11,5}00\text{ – \$10,000}\\ \text{= \$1,500}\end{array}$ (14)

T-accounts:

Preferred stock
		Op. Bal.	$400,000
			$20,000
		Cl. Bal.	$420,000

(15)

Common stock
		Op. Bal.	$160,000
			$12,000
			$10,000
		Cl. Bal.	$182,000

(16)

Capital in excess of par value-Common stock
		Op. Bal.	$800,000
			$88,000
			$100,000
		Cl. Bal.	$988,000

(17)

Capital in excess of par value-preferred stock
		Op. Bal.	$400,000
			$20,000
		Cl. Bal.	$420,000
Capital form treasury stock
		,	$1,500
		Cl. Bal.	$1,500

(18)

Retained earnings
		Op. Bal.	$850,000
			$125,000
		Cl. Bal.	$975,000

(19)

Treasury stock
Repurchase	$10,000		$200,000
Cl. Bal.	$190,000

(20)