Chapter 12, Problem 5PA

To determine

Journalize the transactions.

Answer to Problem 5PA

Journalize the transactions for Corporation P.

Date		Account Titles and Explanation	Debit ($)	Credit ($)
January	9	No entry is required
February	28	Treasury stock $\left(\text{40,000 shares}\times \text{\$28 per share}\right)$	1,120,000
		Cash		1,120,000
		(To record the purchase of 40,000 shares of treasury stock)
May	1	Cash Dividends                                        (2)	199,200
		Cash Dividends Payable		199,200
		(To record the declaration of cash dividends)
July	10	Cash Dividends Payable                          (2)	199,200
		Cash		199,200
		(To record the payment of cash dividends)
September	7	Cash $\left(\text{30,000 shares }\times \text{ \$34 per share}\right)$	1,020,000
		Treasury stock                $\left(\text{80,000 shares }\times \text{ \$28 per share}\right)$		840,000
		Paid-in capital from treasury stock     $\left(\$1,020,000-\$840,000\right)$		180,000
		(To record sale of treasury stock for above the cost price)
October	1	Cash Dividends                                        (4)	202,800
		Cash Dividends Payable		202,800
		(To record the declaration of cash dividends)
October	1	Stock Dividends                                       (6)	856,800
		Common Stock Dividends Distributable                                                                                              (7)		595,000
		Paid-in Capital in excess of Stated      Value-Common stock                          (8)		261,800
		(To record the declaration of stock dividends)
December	1	Cash Dividends Payable                         (4)	202,800
		Cash		202,800
		(To record the payment of cash dividends)
December	1	Common Stock Dividends Distributable (7)	595,000
		Common Stock		595,000
		(To record the distribution of stock dividends)

Table 1

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.

Retained earnings statement

This is a financial statement that shows the amount of the net income retained by a company at a particular point of time for reinvestment and pays its debts and obligations. It shows the amount of retained earnings that is not paid as dividends to the shareholders.

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.

Working note:

Compute number of common shares outstanding after the purchase of treasury stock on February 28.

    $\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{after the purchase of treasury stock}\\ \text{on February 28}\end{array}\}=\left[\begin{array}{l}\text{Number of shares outstanding}\\ \text{as of January 9 }-\text{ Number}\\ \text{of treasury shares purchased}\\ \text{on February 28}\end{array}\right]\\ \text{=1,200},000\text{ shares }-40\text{,000 shares}\\ \text{=1,160,000 shares}\end{array}$

   (1)

Compute the amount of total cash dividends declared on May 1.

    $\begin{array}{c}\begin{array}{l}\text{Amount of total cash dividends}\\ \text{declared on May 1}\end{array}\}\text{ =}\left[\begin{array}{l}\text{Cash divided for preferrence shares +}\\ \text{Cash divided for common shares +}\end{array}\right]\\ \text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Number of preferrence shares}\times \\ \text{\$0}\text{.80per share}\end{array}\right)+\\ \left(\begin{array}{l}\text{Number of shares outstanding}\\ \text{after the purchase of treasury stock}\\ \text{on February 28}\times \text{\$0}\text{.12 per share}\end{array}\right)\end{array}\right]\\ =\left[\begin{array}{l}\left(75,000\text{ shares}\times \text{\$0}\text{.80}\right)+\\ \left(\text{1,160,000}\left(1\right)\times \text{\$0}\text{.12}\right)\end{array}\right]\\ =\$199,200\end{array}$

   (2)

Compute number of common shares outstanding after the sale of treasury stock on September 7.

    $\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{after the sale of treasury stock}\\ \text{on September 7}\end{array}\}=\left[\begin{array}{l}\text{Number of shares outstanding}\\ \text{after the purchase of treasury stock}\\ \text{on February 28 +Number}\\ \text{of treasury shares sold}\\ \text{on September 7}\end{array}\right]\\ \text{=1,160,000 shares}\left(1\right)+30,000\text{ shares}\\ \text{=1,190,000 shares}\end{array}$

   (3)

Compute the amount of total cash dividends declared on October 1.

    $\begin{array}{c}\begin{array}{l}\text{Amount of total cash dividends}\\ \text{declared on October 1}\end{array}\}\text{ =}\left[\begin{array}{l}\text{Cash divided for preferrence shares +}\\ \text{Cash divided for common shares +}\end{array}\right]\\ \text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Number of preferrence shares}\times \\ \text{\$0}\text{.80per share}\end{array}\right)+\\ \left(\begin{array}{l}\text{Number of shares outstanding}\\ \text{after the sale of treasury stock}\\ \text{on September 7}\times \text{\$0}\text{.80per share}\end{array}\right)\end{array}\right]\\ =\left[\begin{array}{l}\left(75,000\text{ shares}\times \text{\$0}\text{.80}\right)+\\ \left(\text{1,190,000}\left(1\right)\times \text{\$0}\text{.12}\right)\end{array}\right]\\ =\$202,800\end{array}$

   (4)

Compute the stock dividends shares.

  $\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding after}\\ \text{the sale of treasury stock on September 7}\times \\ \text{Stock dividend percentage}\end{array}\right\}\\ \text{= 1,190,000 shares }\left(3\right)\text{× 2\%}\\ \text{= 23,800 shares}\end{array}$                          

   (5)

Compute the stock dividends amount payable to common stockholders.

  $\begin{array}{c}\text{Stock dividends = Stock dividend shares }\times \text{ Market value per share}\\ \text{= 23,800 shares}\left(5\right)\text{ × \$36}\\ \text{= \$856,800}\end{array}$                 

   (6)

Compute common stock dividends distributable value.

  $\begin{array}{c}\begin{array}{l}\text{Common stock dividend}\\ \text{distributable value}\end{array}\}\text{ = Stock dividend shares }\times \text{ Par value of stock}\\ \text{= 23,800 shares}\left(5\right)\text{ × \$25}\\ \text{= \$595,000}\end{array}$                             

   (7)

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

  $\begin{array}{c}\text{Paid-in capital = Stock dividends –Common stock dividend distributable value}\\ \text{= \$856,800}\left(6\right)\text{ – \$595,000}\left(7\right)\\ \text{= \$261,800}\end{array}$      

   (8)

Note:

Stock split does not affect the accounting equation of assets, liabilities, or stockholders’ equity. It will affect only the number of shares outstanding and value per share. Hence, on January 9 no entry is passed.