Chapter 13, Problem 4PA

(1) and (2)

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 ($)	Credit ($)
20Y
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.

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

(2)

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

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

(3)

Compute the stock dividends shares.

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

(4)

Compute the stock dividends amount payable to common stockholders.

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

(5)

Compute common stock dividends distributable value.

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

(6)

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

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

(7)

Compute number of shares outstanding as on December 28.

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

(8)

Calculate the amount of cash dividend declared on December 28.

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

Post the above journal entries 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

Prepare a retained earnings statement for the year ended December 31, 20Y6.

Explanation of Solution

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.

Prepare a retained earnings statement for the year ended December 31, 20Y6.

Incorporation ME
Retained Earnings Statement
For the Year Ended December 31, 20Y6
Retained earnings, January 1, 20Y6			$33,600,000
Net income for year		$1,125,000
Less: Dividends:
Cash	-$43,800
Stock	-$450,000	-$493,800
Change in retained earnings			$631,200
Retained earnings, December 31, 20Y6			$34,231,200

Table (10)

(4)

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.

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)