Chapter 16, Problem 14P

Gray Company lists the following shareholders’ equity items on its December 31, 2018, balance sheet:

The following stock transactions occurred during 2019:

Required:

1. 1. Prepare journal entries to record the preceding transactions.
2. 2. Prepare the December 31, 2019, shareholders’ equity section (assume that 2019 net income was $225,000).

To determine

Prepare necessary journal entry to record the given transactions.

Explanation of Solution

Stockholders’ Equity Section:

It is refers to the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.

Date	Account Titles and explanation	Debit ($)	Credit ($)
January 4, 2019	Cash $\left(3,000\times 25\right)$	75,000
	Common stock , at $10par		10,000
	Additional paid-in capital from stock      dividend		45,000
	( To record the issuance of 1000 share of common stock at $40 per share)
January 30, 2019	Dividend payable: Preferred $\left(\left(\$100\times 8\%\right)\times 1,200\right)$	9,600
	Dividend payable: Common (1)	32,000
	Cash		41,600
	(To record declaration of preferred and common stock)
March 2, 2019	Cash $\left(400\times \$125\right)$	15,000
	Preferred stock, $100 par	1,500
	Additional paid-in capital on preferred      stock		5,000
	( To record issuance of preferred stock)		11,500
March 7, 2019	Cash $\left(600\times \$24\right)$	8,200
	Treasury stock $\left(600\times \$21\right)$		6,200
	Additional paid-in capital on common           stock		2,000
	(To record the reissuance of treasury stock)
June 15, 2019	No entry  is required
June 15, 2019	No entry  is required
July 2, 2019	Retained earnings (2)	27,440
	Common stock to be distributed      $\left(1,960\times \$5\right)$		9,800
	Additional paid-in capital from stock      dividend		17,640
	(To record declaration of stock dividend)
August 3,2019	Common stock to be  distributed	9,800
	Common stock, $5 par		9,800
	(To record the issuance of stock dividend)
October 1,2019	Allowance  for  change in value of investment $\left(2,000\times \left[\$16-\$15\right]\right)$	2,000
	Unrealized increase in the value of available-for-sale of securities $\left(2,000\times \left[\$15-\$12\right]\right)$	6,000
	Gain on disposal of investment      $\left(2,000\times \left[\$16-\$12\right]\right)$		8,000
	(To record the declaration of property  dividend)
	Retained earnings $\left(2,000\times \$16\right)$	32,000
	Property dividend payable		32,000
	(To record the current value of the bond)
November 1,2019	Property dividend payable	32,000
	Investment in Company L stock		24,000
	Allowance  for  change in value of          investment $\left(2,000\times \left[\$16-\$12\right]\right)$		8,000
	(To record the issuance of property dividend)
December 31, 2019	Retained earnings	53,960
	Dividends payable: Preferred (3)		12,800
	Dividends payable: Common (4)		41,160
	(To record the declaration of annual per share dividend to the preferred and common stock)

Table (1)

Note:

Note 1: On July 15 memorandum entry is made as the common stock split two for one and the par value is reduced from $10 to $5.

Note 2: On July 15 memorandum entry is made when treasury stock participates in the stock split. The treasury stock has 2,800 shares at a $6 par value per share costing $10.50 per share.

Working notes:

(1) Calculate the amount of dividend payable to the common stock:

$\begin{array}{c}\begin{array}{l}\text{Amount of dividend payable}\\ \text{to the common stock}\end{array}\}\text{=}\left(\begin{array}{l}\text{Common stock shares}-\\ \text{Treasury shares issued}\end{array}\right)\times \text{Dividend per share}\\ \text{=}\left(\text{18,000}-2,000\right)\times \$2\\ =\$32,000\end{array}$

(2) Calculate the amount of retained earnings:

Particulars	Amount in $
Shares issued	42,000
Less: Treasury shares (1,400 stock split for two for one)	2,800
Shares outstanding  $\left(A\right)$	39,200
Multiply: Stock dividend $\left(B\right)$	5%
Shares  in stock dividend $\left(A\times B\right)$	1,960
Multiply: Current market price	$14
Reduction in retained earnings	27,440

Table (2)

(3) Calculate the amount of dividend payable to the preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Amount of dividend payable }\\ \text{to the preferred stock}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Number of preferred shares }\\ \text{+Additional shares issued}\end{array}\right)\times \left(\begin{array}{l}\text{Percent of}\\ \text{ dividend}\end{array}\right)\times \text{Par value}\\ \text{=}\left(1,200+400\right)\times 8\%\times \$100\\ =\$12,800\end{array}$

(4) Calculate the amount of dividend payable to the preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Amount of dividend payable }\\ \text{to the common stock}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Number of common stock }\\ -\text{Treasury stock dividend }\\ \text{available+Number of shares in }\\ \text{the stock dividend}\end{array}\right)\times \text{Dividend per share}\\ \text{=}\left(42,000-2,800+1,960\right)\times \$1\\ =\$41,160\end{array}$

To determine

Prepare Company G’s statement of stockholder’s equity section for 2016.

Explanation of Solution

Company G
Shareholder's equity
For the  year ended December 31,2019
Particulars	Amount in $
Contributed Capital:
Preferred stock (8%, $100 par, 1,600 shares issued and outstanding)	160,000
Common stock ($5 par, 43,960 shares issued of which 41,160 are outstanding and 2,800 shares are being held as treasury stock)	219,800
Additional paid-in capital on preferred stock $\left(\$21,600+\$10,000\right)$	31,600
Additional paid-in capital on common stock $\left(\$90,000+\$45,000-\$42,000\right)$	93,000
Additional paid-in capital from treasury stock	1,800
Additional paid-in capital from stock dividend	17,640
Total contributed capital	523,840
Retained earnings (restricted in the amount of $29,400, the cost of the treasury shares) (5)	341,600
Total contributed capital, retained earnings, and donated capital	865,440
Less: Treasury stock (2,800 shares of common at $10.50 per share)	(29,400)
Total Shareholders’ Equity	836,040

 (Table 3)

(5) Calculate the amount of retained earnings:

$\begin{array}{c}\text{Amount of retained earnings =}\left(\begin{array}{l}\text{Opening balance+Net income}-\text{Reduction in the }\\ \text{retained earnings}-\text{Current value of the bond}\\ -\text{Reduction in retained earnings on annual }\\ \text{dividend per share }\end{array}\right)\\ =\$230,000+\$225,000-\$27,440-\$32,000-\$53,960\\ =\$341,600\end{array}$