Chapter 12, Problem 8PA

a.

To determine

Prepare the stockholders’ equity section of the balance sheet for Corporation M at December 31, 2017.

Explanation of Solution

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

Prepare the stockholders’ equity section of the balance sheet for Corporation M at December 31, 2017.

Table (1)

Working Notes:

Compute the capital stock value.

$\begin{array}{c}\text{Capital stock value = }\left\{\begin{array}{l}\text{Number of shares issued }\times \\ \text{Par value per share}\end{array}\right\}\\ \text{= 150,000 shares × \$10}\\ \text{= \$1,500,000}\end{array}$

Compute the amount of stock dividends to be distributed.

Step 1: Compute the number of shares to be distributed as stock dividends.

$\begin{array}{c}\text{Stock dividend shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{Stock dividend percentage}\end{array}\right\}\\ \text{= }\left(\text{150,000 shares –10,000 shares}\right)\text{× 10\%}\\ \text{=140,000 shares × 10\%}\\ \text{= 14,000 shares}\end{array}$ (1)

Step 2: Compute the amount of stock dividends to be distributed (Refer to Equation (1) for stock dividend shares value).

$\begin{array}{c}\begin{array}{l}\text{Stock dividends to be }\\ \text{distributed value}\end{array}\}\text{ = Stock dividend shares }\times \text{ Par value of stock}\\ \text{= 14,000 shares × \$10}\\ \text{= \$140,000}\end{array}$

Compute additional paid-in capital from issuance of stock.

$\begin{array}{c}\begin{array}{l}\text{Additional paid-in capital }\\ \text{from issuance of stock}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares issued}\times \\ \left(\text{Market value – Par value}\right)\end{array}\right\}\\ \text{= 150,000 shares }\times \left(\text{\$30 – \$10}\right)\\ \text{= \$3,000,000}\end{array}$

Compute additional paid-in capital from stock dividends (Refer to Equation (1) for stock dividend shares).

$\begin{array}{c}\begin{array}{l}\text{Additional paid-in capital }\\ \text{from stock dividend}\end{array}\}\text{ = Stock dividend shares }\times \left(\text{Market value – Par value}\right)\\ \text{= 14,000 shares }\times \left(\text{\$35 – \$10}\right)\\ \text{= \$350,000}\end{array}$

Compute amount of retained earnings for the year ended December 31, 2017.

Step 1: Compute amount of retained earnings distributable for stock dividends (Refer to Equation (1) for stock dividend shares value).

$\begin{array}{c}\text{Stock dividend = Stock dividend shares }\times \text{ Market value per share}\\ \text{= 14,000 shares × \$35}\\ \text{= \$490,000}\end{array}$ (2)   

Step 2: Compute amount of retained earnings.

Corporation M
Statement of Retained Earnings
For the Year Ended December 31, 2017
Retained earnings, January 1, 2017	$0
Add: Net income	940,000
	940,000
Less: Stock dividends	(490,000)
Retained earnings, December 31, 2017	$450,000

Table (2)

Note: Refer to Equation (2) for value and computation of stock dividends.

Conclusion

Thus, the total stockholders’ equity of Corporation M December 31, 2017 is $5,100,000.

b.

To determine

Prepare the stockholders’ equity section of the balance sheet for Corporation M at December 31, 2018.

Explanation of Solution

Prepare the stockholders’ equity section of the balance sheet for Corporation M at December 31, 2018.

Table (3)

Working Notes:

Compute the number of shares issued and outstanding, after the stock dividend and stock split transactions.

$\begin{array}{c}\begin{array}{l}\text{Number of shares issued }\\ \text{and outstanding}\end{array}\}\text{ = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Number of shares issued+ }\\ \text{Number of stock dividend shares}\end{array}\right)\times \\ \text{Number of shares for 1 common share}\end{array}\right\}\\ \text{=}\left(\text{150,000 shares +14,000 shares}\right)\text{×2 shares}\\ \text{=164,000 shares×2 shares}\\ \text{=328,000 shares}\end{array}$ (3)

Compute the capital stock value (Refer to Equation (3) for value of number of shares issued and outstanding).

$\begin{array}{c}\text{Capital stock value = }\left\{\begin{array}{l}\text{Number of shares issued and outstanding}\times \\ \text{Par value per share}\end{array}\right\}\\ \text{= 328,000 shares × \$5}\\ \text{= \$1,640,000}\end{array}$

Compute additional paid-in capital value from treasury stock.

$\begin{array}{c}\begin{array}{l}\text{Additional paid-in capital }\\ \text{from treasury stock}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of treasury shares reissued }\times \\ \left(\text{Selling price–Purchase price}\right)\end{array}\right\}\\ \text{= 10,000 shares × }\left(\text{\$39–\$34}\right)\\ \text{= 10,000 shares × \$5}\\ \text{= \$50,000}\end{array}$

Compute amount of retained earnings for the year ended December 31, 2018.

Step 1: Compute amount of cash dividends.

$\begin{array}{c}\text{Cash dividends}=\left\{\begin{array}{l}\text{Number of common shares}\times \\ \text{Dividend per share}\end{array}\right\}\\ =328,000\text{ shares}\times \$2\text{ per share}\\ =\$656,000\end{array}$ (4)   

Step 2: Compute amount of retained earnings.

Corporation M
Statement of Retained Earnings
For the Year Ended December 31, 2018
Retained earnings, January 1, 2018	$450,000
Add: Net income	1,080,000
	1,530,000
Less: Cash dividends	(656,000)
Retained earnings, December 31, 2018	$874,000

Table (4)

Note: Refer to Table (2) for value and computation of opening retained earnings balance, and Equation (4) for value and computation of cash dividends.

Conclusion

Thus, the total stockholders’ equity of Corporation M at December 31, 2018 is $5,914,000.