Chapter 12, Problem 12.4APR

(1) and (2)

To determine

To journalize: The transactions and post to the eight selected accounts.

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.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Record the transactions for Incorporation ME.

Date		Account Titles and Explanation			Debit ($)	Credit ($)
20Y6
January	22	Cash Dividends Payable			28,000
			Cash			28,000
		(To record the payment of cash dividends)
April	10	Cash $\left(75,000\text{ shares}\times \$24\right)$			1,800,000
			Common Stock $\left(75,000\text{ shares}\times \$20\right)$			1,500,000
			Paid-in Capital in Excess of stated value     Common Stock    $\left(\$1,800,000-\$1,500,000\right)$			300,000
		(To record issuance of 75,000 shares in excess of stated value)
June	6	Cash   $\left(25,000\text{ shares}\times \$26\right)$			650,000
			Treasury stock   $\left(25,000\text{ shares}\times \$18\text{ per share (1) }\right)$			450,000
			Paid-in capital from treasury stock     $\left(\$650,000-\$450,000\right)$			200,000
		(To record sale of treasury stock for above the cost price of $18 per share)
July	5	Stock Dividends			450,000
			Common Stock Dividends Distributable			360,000
			Paid-in Capital in excess of Stated Value-Common stock			90,000
		(To record the declaration of stock dividends)
August	15	Common Stock Dividends Distributable			360,000
			Common Stock			360,000
		(To record the distribution of stock dividends)
November	23	Treasury stock $\left(20,000\text{ shares}\times \$19\text{ per share}\right)$			570,000
				Cash		570,000
		(To record the purchase of 30,000 shares of treasury stock)
December	28	Cash Dividends			43,800
				Cash Dividends Payable		43,800
		(To record the declaration of cash dividends)
December	31	Retained Earnings			493,800
				Stock dividends		450,000
				Cash Dividends		43,800
		(To record the closing of stock dividends and cash dividends to retained earnings account)

Table (1)

Working note:

Calculate treasury stock cost per share.

$\begin{array}{c}\text{Treasury}\text{stock=}\frac{\left[\begin{array}{l}\text{Total}\text{value}\text{of}\text{treasury}\text{stock}\\ \text{athandasonJanuary}\text{1,}\text{20Y6}\end{array}\right]}{\left[\begin{array}{l}\text{Number}\text{of}\text{treasury}\text{stock}\\ \text{at}\text{hand}\text{as}\text{on}\text{Januray}\text{1,}\text{20Y6}\end{array}\right]}\\ \text{=}\frac{\text{\$450,000}}{\text{25,000}\text{shares}}\\ \text{=\$18}\end{array}$ (1)

Compute number of shares outstanding after the sale of treasury stock on June 6.

$\begin{array}{c}\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\\ \text{after}\text{the}\text{sale}\text{of}\text{treasury}\text{stock}\text{on}\text{June}\text{6}\end{array})\text{=}\left[\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\text{as}\\ \text{of}\text{January}\text{1,20Y6+Number}\text{of}\text{treasury}\\ \text{shares}\text{issued}\text{on}\text{June}\text{6}\end{array}\right]\\ \text{=375,000shares+75,000shares}\\ \text{=450,000shares}\end{array}$   (2)

Compute the stock dividends shares.

$\begin{array}{c}\text{Stock}\text{dividends}\text{shares=}\left(\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\text{after}\\ \text{the}\text{sale}\text{of}\text{treasury}\text{stock}\text{on}\text{June}\text{6×}\\ \text{Stock}\text{dividend}\text{percentage}\end{array}\right)\\ \text{=450,000shares(2)×4\%}\\ \text{=18,000shares}\end{array}$                             (3)

Compute the stock dividends amount payable to common stockholders.

$\begin{array}{c}\text{Stock}\text{dividends=Stock}\text{dividend}\text{shares×Market}\text{value}\text{per}\text{share}\\ \text{=18,000shares(3)×\$25}\\ \text{=\$450,000}\end{array}$ (4)

Compute common stock dividends distributable value.

$\begin{array}{c}\begin{array}{l}\text{Common}\text{stock}\text{dividend}\\ \text{distributable}\text{value}\end{array})\text{=Stock}\text{dividend}\text{shares×Par}\text{value}\text{of}\text{stock}\\ \text{=18,000shares(3)×\$20}\\ \text{=\$360,000}\end{array}$                                (5)

Compute paid-in capital in excess of par value-common stock.

$\begin{array}{c}\text{Paid}\text{in}\text{capital=Stock}\text{dividends}-\text{Common}\text{stock}\text{dividend}\text{distributable}\text{value}\\ \text{=\$450,000(4)}\text{-\$360,000(5)}\\ \text{=\$90,000}\end{array}$ (6)

Compute number of shares outstanding as on December 28.

$\begin{array}{c}\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\\ \text{as}\text{on}\text{December}\text{28}\end{array})\text{=}\left[\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\text{after}\text{the}\text{sale}\text{of}\text{treasury}\\ \text{stock}\text{on}\text{June}\text{6+Issuance}\text{of}\text{stock}\text{dividends}\text{on}\text{August}\text{15}-\\ \text{Purchase}\text{of}\text{treasury}\text{stock}\text{on}\text{November}\text{23}\end{array}\right]\\ \text{=}\left[\begin{array}{l}\text{450,000shares(2)+18,000shares(3)}\\ -\text{30,000shares}\end{array}\right]\\ \text{=438,000shares}\end{array}$ (7)

Calculate the amount of cash dividend declared on December 28.

$\begin{array}{c}\text{Cash}\text{dividend}\text{declared}\text{on}\text{December}\text{28=}\left[\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\text{as}\\ \text{on}\text{December}\text{28×\$0}\text{.10per}\text{share}\end{array}\right]\\ \text{=438,000}\text{shares(7)×\$0}\text{.10shares}\\ \text{=\$43,800}\end{array}$ (8)

 Enter the beginning balance and post the transactions into the stockholders’ equity accounts for Incorporation ME.

Common stock account is a component of stockholder’s equity with a normal credit balance.

Common stock
Date	Particulars	Debit	Date	Particulars	Credit
			January 1	Balance	$7,500,000
			April 10	Cash	$1,500,000
			August 15	Stock dividends distributable	$360,000
	Total	$ 0		Total	$ 9,360,000
			December 31	Balance	$9,360, 000

Table (2)

Paid-in capital in excess of stated value - Common stock account is a component of stockholder’s equity with a normal credit balance.

Paid-in capital in excess of stated value - Common stock
Date	Particulars	Debit	Date	Particulars	Credit
			January 1	Balance	$825,000
			April 10	Cash	$300,000
			July 5	Stock dividends	$90,000
	Total	$ 0		Total	$ 1,215,000
			December 31	Balance	$ 1,215,000

Table (3)

Retained earnings are a component of stockholder’s equity with a normal credit balance.

Retained earnings
Date	Particulars	Debit	Date	Particulars	Credit
December 31	Cash and stock dividends	$493,800	January 1	Balance	$33,600,000
			December 31	Net income	$1,125,000
	Total	$493,800		Total	$34,725,000
			December 31	Balance	$ 34,231,200

Table (4)

Treasury stock is a component of stockholder’s equity with a normal debit balance.

Treasury stock
Date	Particulars	Debit	Date	Particulars	Credit
January 1	Balance	$450,000	June 6	Cash	$450,000
November 23	Cash	$570,000
	Total	$ 1,020,000		Total	$450,000
December 31	Balance	$ 450,000

Table (5)

Paid-in capital from treasury stock is a component of stockholder’s equity with a normal credit balance.

Paid-in capital from treasury stock
Date	Particulars	Debit	Date	Particulars	Credit
			June 6	Cash	$200,000
	Total	$ 0		Total	$200,000
			December 31	Balance	$200,000

Table (6)

Stock dividend distributable is a contra stockholder’s equity with a normal credit balance.

Stock dividend distributable
Date	Particulars	Debit	Date	Particulars	Credit
August 15	Common stock	$360,000	June 5	Stock dividend	$360,000
	Total	$360,000		Total	$360,000
			December 31	Balance	$0

Table (7)

Stock dividend is a component of stockholder’s equity with a normal debit balance.

Stock dividend
Date	Particulars	Debit	Date	Particulars	Credit
July 5	Stock dividend distributable	$360,000	December 31	Retained earnings	$450,000
July 5	Paid in capital in excess of stated value –Common value	$90,000
	Total	$450,000		Total	$450,000
			December 31	Balance	$0

Table (8)

Cash dividend is a component of stockholder’s equity with a normal debit balance.

Stock dividend
Date	Particulars	Debit	Date	Particulars	Credit
December 28	Cash dividend payable	$43,800	December 31	Retained earnings	$43,800
	Total	$43,800		Total	$43,800
			December 31	Balance	$0

Table (9)

(3)

To determine

To prepare: Statement of stockholders’ equity the year ended December 31, 20Y6.

Explanation of Solution

Statement of stockholders’ equity: The statement which reports the changes in stock, paid-in capital, retained earnings, and treasury stock, during the year is referred to as statement of stockholders’ equity.

Prepare a statement of stockholders’ equity for the year ended December 31, 20Y6.

Incorporation ME
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y6
	Common Stock	Additional Paid-in Capital	Retained Earnings	Total
Balances, January 1, 20Y6	$7,500,000	$825,000	$33,600,000	$41,925,000
Net income			1,125,000	1,125,000
Dividends on stock	360,000	90,000	(450,000)	0
Cash dividends			(43,800)	(43,800)
Paid-in capital from treasury stock		200,000		200,000
Sale of treasury stock			(570,000)	(570,000)
Issuance of additional stock	1,500,000	300,000		1,800,000
Balances, December 31, 20Y6	$9,360,000	$1,415,000	$34,231,200	$44,436,200

Table (10)

(4)

To determine

To prepare: The stockholders’ equity section of the December 31, 20Y6, balance sheet.

Explanation of Solution

Stockholders’ equity: It refers to the amount of capital that includes the amount of investment by the stockholders, earnings generated from the normal business operations, and less any dividends paid to the stockholders.

Prepare the stockholders’ equity section of the December 31, 20Y6, balance sheet.

Incorporation ME
Partial Balance Sheet
December 31, 20Y8
Stockholders' Equity	Amount	Amount	Amount
Paid-in capital:
Common stock, $20 stated (500,000 shares authorized; 500,000 shares issued, 468,600 shares outstanding)	$9,360,000
Excess over stated value	$1,215,000
Paid-in capital, common stock		$10,575,000
From sale of treasury stock		$200,000
Total paid-in capital			$10,775,000
Retained earnings			$34,231,200
Total			$45,006,200
Treasury common stock (30,000 shares at cost)			$(570,000)
Total stockholders' equity			$44,436,200

Table (11)