Chapter 13, Problem 2BPSB

1. Journal Entries to record Stockholders Equity Transactions.
To determine

Concept Introduction:

Stockholders Equity Transactions:

Stockholders equity Transactions refer to, transactions carried out by an organisation by issuing its shares. The main purpose of issuance of shares is to raise funds, but shares could also be issued, to pay dividends in the form of "Stock Dividends", Pay off Lenders, Creditors, Promoters in lieu of Cash etc.

Requirement 1

Journal Entries of Stockholders Equity Transactions.

Answer to Problem 2BPSB

Date	Particulars		Debit	Credit
Jan-10	Treasury Stock		480000
	To Cash			480000
	(Being own Shares Purchased)
Mar-02	Dividend		240000
	To Dividend Payable			240000
	(Being dividend declared @ $1.5 per share)
Mar-31	Dividend Payable		240000
	To Cash			240000
	(Being Dividend paid)
Jul-06	Cash		312000
	To Treasury Stock			288000
	To Paid In Capital in Excess of Treasury		24000
	(Being 24000 Shares Sold for $13 each)
Aug-22	Cash		152000
	Paid in Capital in Excess of Treasury		24000
	Retained Earnings		16000
	To Treasury Stock			192000
	(Being Treasury Stock Sold at a loss)
Sep-05	Dividend		500000
	To Dividend Payable			500000
	(Being dividend declared @ $2.5 per share)
Oct-28	Dividend Payable		500000
	To Cash			500000
	(Being Dividend paid)
Dec-31	Income Summary		1072000
	To Retained Earnings			1072000
	(Being Income Summary Closed)

Explanation of Solution

The above solution can be explained as below:

1. The organisation purchased 40000 shares, thus the purchase will be treated as purchase of treasury stock. Treasury Stock is nothing, but the organisation buying its own shares to either increase the demand of its shares in the market, or restrict its voting powers. In this case Treasury stock will be debited and cash will be credited, exactly by the amount paid for such shares. Which is $12 per share, and comes to a total of $480000.
2. When dividend is declared, dividend will be debited and dividend payable will be credited to create a liability account. Since total outstanding shares are 160000(Excluding Treasury stocks purchased), and dividend is paid at $1.5 per share, thus the total dividend will be $240000.
3. Dividend provision made in above entry has been paid thus, dividend payable will be debited and cash will be credited.
4. 24000 Treasury shares purchased have been sold @$13 per share, Thus Treasury stock will be credited by $288000(24000*$12) and $24000 will be credited the Paid in Capital in excess of Treasury. Cash will be debited by total amount of $312000(24000*$13).
5. 16000 Treasury shares purchased have been sold @$9.5 per share, Thus Treasury stock will be credited by $192000(16000*$20) and $24000 will be debited from the Paid in Capital in excess of Treasury and Remaining amount of Loss of $16000 will be debited from Retained Earnings. Cash will be debited by total amount of $152000(16000*$9.5).
6. When dividend is declared, dividend will be debited and dividend payable will be credited to create a liability account. Since total outstanding shares are 200000, and dividend is paid at $2.5 per share, thus the total dividend will be $500000.
7. Dividend provision made in above entry has been paid thus, dividend payable will be debited and cash will be credited.
8. Income Summary is an account Balance which remains after closing all revenue and expense accounts. Thus Income Summary has a credit balance of $1072000, which will be debited and retained earnings will be credited.

Statement of Retained Earnings.

To determine

Concept Introduction:

Retained Earnings:

Retained Earnings comprises amounts of Net Income that have not been distributed as dividend, but have been saved for further development of the organisation. Besides Net Income other entries like Stock dividend, Sale of Treasury Stock, Dividends paid off are also routed through the retained earnings account.

Requirement 2

Statement of Retained Earnings.

Answer to Problem 2BPSB

Particulars	$
Beginning Balance of Retained Earnings	2160000
Add: Net Income	1072000
Less Dividend	-740000
Less:Loss on Sale of Treasury Stock	-16000
Ending Balance of Retained Earnings	2476000

Explanation of Solution

As given in the Question Retained Earnings have a balance of $2160000, Thus, Total Dividend of $740000 will be reduced and Net Income of $1072000 will be added. Also loss in sale of Treasury Stocks will be reduced, Which will amount to $2476000 as ending retained earnings.

Stockholders Equity Section.

To determine

Concept Introduction:

Stockholders Equity Section:

Stock Holders Equity Section Comprises of Total Stock holding, Retained Earnings and Paid in Capital in Excess of Stockholding at the end of the year.

Requirement 3

Stockholders Equity Section of The Balance Sheet.

Answer to Problem 2BPSB

Common Stock-$10 par value, 100000 shares authorised, 40000 shares issued and outstanding	200000
Paid in Capital in excess of par value, common stock	1400000
Retained Earnings	2476000
Total Stockholder's Equity	4076000

Explanation of Solution

Total of Stockholding outstanding, Retained Earnings and Paid in Capital in excess of par value will be shown in Shareholders equity account.