Chapter 11, Problem 9E

Requirement – 1

To determine

To indicate: The effect of each of the given transaction on total assets, liabilities and stockholder’s equity.

Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

$\text{Assets = Liabilities + Stockholder's Equity}$

Accounting effect of given transactions are as follows:

Event	Assets	=	Liabilities	+	Stockholder’s equity
a.	Decrease $(-)$	=	No effect	+	Decrease $(-)$
b.	No effect	=	Increase $(+)$	+	Decrease $(-)$
c.	Decrease $(-)$	=	Decrease $(-)$	+	No effect
d.	Increase $(+)$	=	No effect	+	Increase $(+)$
e.	No effect	=	No effect	+	Increase $(+)$ and Decrease $(-)$

Table (1)

Requirement – 2

To determine

To prepare: The journal entries for the given transactions.

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, expenses.

Journal entries of Company M for the given transaction are as follows:

a. Treasury stock purchased:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Treasury stock (-x SE)		350,000
	Cash (-A)			350,000
	(To record purchase of treasury stock)

Table (2)

• Treasury stock is a contra common stock account and it decreased the value of common stock by $350,000. Hence, debit the treasury stock for $350,000.
• Cash is an assets account and it decreased the value of asset by $350,000. Hence, credit the cash account for $350,000.

b. Declared cash dividends:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Dividends (-SE)		260,000
	Dividends payable (+L)			260,000
	(To record dividend declared by the board of directors)

Table (3)

• Dividends are the expenses account and it decreased the value of stockholder’s equity by $260,000. Hence, debit the dividends account for$260,000.
• Dividends payable is a liability account and it increased the value of liability by $260,000. Hence, credit the dividends payable for $260,000.

c. Paid dividends to stockholders:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Dividends payable (+L)		260,000
	Cash (-A)			260,000
	(To record cash dividend paid to stockholder’s)

Table (4)

• Dividends payable is a liability account and it decreased the value of liability by $260,000. Hence, debit the dividends payable for $260,000.
• Cash is an assets account and it decreased the value of asset by $260,000. Hence, credit the cash account for $260,000.

d. Issued 100,000 additional shares at $2 per share:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A)		200,000
	Common stock (+SE) (1)			10,000
	Additional paid up capital (+SE)(2)			190,000
	(To record issuance of additional stock)

Table (5)

• Cash is an assets account and it increased the value of asset by $200,000. Hence, debit the cash account for $200,000.
• Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $10,000, Hence, credit the common stock for $10,000.
• Additional paid up capital is a component of stockholder’s equity and it increased the value of stockholder’s equity by $190,000. Hence, credit the additional paid up for $190,000.

Working note:

Calculate the value of common stock at par value

$\begin{array}{c}\text{Common stock =Number of share issued }\times \text{Par value of per share}\\ \text{=100,000 share}\times \text{\$0}\text{.10}\\ \text{=\$10,000}\end{array}$ (1)

Calculate the value of additional capital at $50.

$\begin{array}{c}\text{Common stock =Number of share issued }\times \left(\text{Price per share}-\text{Par value per value}\right)\\ \text{=100,000 share}\times \left(\$2-\$0.10\right)\\ \text{=100,000 share}\times \$1.90\\ =\$190,000\end{array}$ (2)

e. Dividends amount transfer to the retained earnings (closing entry):

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Retained earnings (-SE)		260,000
	Dividends (-SE)			260,000
	(To record closing entry for dividends)

Table (6)

In this closing entry, dividends account is closed by transferring the amount of dividends to the retained earnings in order to bring all the expense accounts balance to zero. Hence, debit the retained earnings for $260,000, and credit the dividends account for $260,000.

Requirement – 3

To determine

To prepare: The stockholder’s equity section of the balance sheet.

Explanation of Solution

Stockholders’ Equity Section:

It is refers to the section of the balance sheet that shows the available balance of stockholders’ equity as on reported date at the end of the financial year.

The stockholder’s equity section of Company M is as follows:

Company M
Statement of stockholder's equity
Particulars	Common stock	Additional paid in capital	Retained earnings	Treasury stock
Beginning	12,500	190,000	150,000	-
Stock issuances	10,000	190,000	-	350,000
Net income	-	-	270,000	-
Dividends	-	-	(260,000)	-
Ending	22,500	380,000	160,000	350,000

Table (7)