Chapter 12, Problem 4PA

Entries for selected corporate transactions

Morrow Enterprises Inc. manufactures bathroom fixtures. Morrow Enterprises’ stockholders’ equity accounts, with balances on January 1, 20Y6, are as follows:

The following selected transactions occurred during the year:

Instructions

1. 1. Enter the January 1 balances in T accounts for the stockholders’ equity accounts listed. Also prepare T accounts for the following: Paid-In Capital from Sale of Treasury Stock; Stock Dividends Distributable; Stock Dividends; Cash Dividends.
2. 2. Journalize the entries to record the transactions, and post to the eight selected accounts. Assume that the closing entry for revenues and expenses has been made and post net income of $1,125,000 to the retained earnings account.
3. 3. Prepare a statement of stockholders’ equity for the year ended December 31, 20Y6. Assume that net income was $1,125,000 for the year ended December 31, 20Y6.
4. 4. Prepare the “Stockholders’ Equity” section of the December 31, 20Y6, balance sheet.

To determine

Journalize the transactions and post to the eight selected accounts.

Explanation of Solution

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.

Stated value: It refers to an amount per share, which is assigned by the board of directors to no par value stock.

Issue of common stock for non-cash assets or services: Corporations often issue common stock for the services received from attorneys or consultants as compensation, or for the purchase of non-cash assets such as land, buildings, or equipment.

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 $\left(\text{75,000 shares}\times \text{\$24}\right)$	1,800,000
				Common Stock $\left(\text{75,000 shares}\times \text{\$20}\right)$		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 $\left(\text{25,000 shares }\times \text{ \$26 per share}\right)$	650,000
				Treasury stock                $\left(\text{25,000 shares }\times \text{\$18 per share}\left(1\right)\right)$		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                         (4)	450,000
				Common Stock Dividends     Distributable                          (5)		360,000
				Paid-in Capital in excess of      Stated Value-Common stock (6)		90,000
				(To record the declaration of stock dividends)
August			15	Common Stock Dividends Distributable (5)	360,000
				Common Stock		360,000
				(To record the distribution of stock dividends)
November			23	Treasury stock $\left(\text{30,000 shares}\times \text{\$19 per share}\right)$	570,000
				Cash		570,000
				(To record the purchase of 30,000 shares of treasury stock)
December			28	Cash Dividends   (8)	43,800
				Cash Dividends Payable		43,800
				(To record the declaration of cash dividends)
December			31	Retained Earnings	493,800
				Stock dividends                   (4)		450,000
				Cash Dividends                    (8)		43,800
				(To record the closing of stock dividends and cash dividends to retained earnings account)

Table (1)

Working note (1)

Calculate treasury stock cost per share.

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

Working note (2)

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

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

Working note (3)

Compute the stock dividends shares.

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

Working note (4)

Compute the stock dividends amount payable to common stockholders.

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

Working note (5)

Compute common stock dividends distributable value.

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

Working note (6)

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

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

Working note (7)

Compute number of shares outstanding as on December 28.

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

Working note (8)

Calculate the amount of cash dividend declared on December 28.

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

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)

To determine

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

Explanation of Solution

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

Table (10)

To determine

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.

Table (11)