Chapter 18, Problem 18.12P

Part A (First quarter of corporation N):

(1)

To determine

Stockholders’ equity:

The claims of owners on a company’s resources, after the liabilities are paid off, are referred to as stockholders’ equity. Therefore, stockholders’ equity is sometimes referred to as net worth of owners or shareholders or stockholders.

To prepare: Journal entries to record the transactions of Corporation N.

Explanation of Solution

Prepare journal entries to record issuance of common share.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
January	2	Cash		30,000,000
		Common Stock			3,000,000
		Paid-in Capital–Excess of Par,        Common			27,000,000
		(To record issue of common stock)

Table (1)

Working Notes:

Compute common stock value.

$\begin{array}{c}\text{Common stock value= Number of shares }\times \text{ Par value per share}\\ \text{= 3,000,000 shares × \$1}\\ \text{= \$3,000,000}\end{array}$    

Compute cash received.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Average price per share}\\ \text{= 3,000,000 shares × \$10}\\ \text{= \$30,000,000}\end{array}$       

Compute paid-in capital excess of par value.

$\begin{array}{c}\text{Paid-in capital excess of par= Cash received – Common stock}\\ \text{= \$30,000,000 – \$3,000,000}\\ \text{= \$27,000,000}\end{array}$

Prepare journal entries to record issuance of preferrred share.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
January	2	Cash		20,000,000
		Preferred Stock			5,000,000
		Paid-in Capital–Excess of Par,        Preferred			15,000,000
		(To record issue of preferred stock)

Table (2)

Working Notes:

Compute preferred stock value.

$\begin{array}{c}\text{Preferred stock value= Number of shares }\times \text{ Par value per share}\\ \text{= 1,000,000 shares × \$5}\\ \text{= \$5,000,000}\end{array}$     

Compute cash received.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Average price per share}\\ \text{= 1,000,000 shares × \$20}\\ \text{= \$20,000,000}\end{array}$        

Compute paid-in capital excess of par value.

$\begin{array}{c}\text{Paid-in capital excess of par= Cash received – Preferred stock}\\ \text{= \$20,000,000 – \$5,000,000}\\ \text{= \$15,000,000}\end{array}$     

(2)

To determine

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.

To prepare: Stockholders’ equity section of balance sheet for Corporation N.

Explanation of Solution

Prepare stockholders’ equity section of balance sheet for Corporation N.

Corporation N
Stockholders’ Equity Section
At the end of first quarter March 31, 2016
Paid-in Capital	Amount ($)
Preferred stock, $5 par, authorized 1,000,000         shares, issued and outstanding 1,000,000         shares	$5,000,000
Common stock, $1 par, authorized 5,000,000         shares, issued and outstanding 3,000,000         shares	3,000,000
Paid-in capital–excess of par	42,000,000
Total paid-in capital	50,000,000
Retained earnings	1,000,000
Total stockholders’ equity	$51,000,000

Table (3)

Part B (Second and third quarter of corporation N):

(1)

To determine

To prepare: Journal entries to record the transactions of Corporation N.

Explanation of Solution

(a)

Prepare journal entry to record purchase of 200,000 treasury stock at $12 per share.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
June	30	Treasury Stock		2,400,000
		Cash			2,400,000
		(To record purchase of treasury stock)

Table (4)

Working Note:

Compute treasury stock value.

$\begin{array}{c}\text{Treasury stock value= Number of shares }\times \text{ Purchase price per share}\\ \text{= 200,000 shares × \$12}\\ \text{= \$2,400,000}\end{array}$

(b)

Prepare journal entry to record the reissue of 50,000 treasury stock at $15 per share.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
July	31	Cash		750,000
		Treasury Stock			600,000
		Paid-in-Capital-Share Repurchase			150,000
		(To record re-issue of treasury stock)

Table (5)

Working Notes:

Compute cash received.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Selling price per share}\\ \text{= 50,000 shares × \$15}\\ \text{= \$750,000}\end{array}$

Compute treasury stock value.

$\begin{array}{c}\text{Treasury stock value= Number of shares }\times \text{ Purchase price per share}\\ \text{= 50,000 shares × \$12}\\ \text{= \$600,000}\end{array}$

Compute paid-in-capital-share repurchase amount.

$\begin{array}{c}\begin{array}{l}\text{Paid-in-capital-share }\\ \text{repurchase amount}\end{array}\}\text{ = }\left\{\begin{array}{l}\left(\text{Selling price –Purchase price}\right)\times \\ \text{Number of shares re-acquired}\end{array}\right\}\\ \text{=}\left(\text{\$15–\$12}\right)\text{ × 50,000 shares}\\ \text{=\$150,000}\end{array}$

(c)

Prepare journal entry to record the reissue of 50,000 treasury stock at $10 per share.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
September	31	Cash		500,000
		Paid-in-Capital-Share Repurchase		100,000
		Treasury Stock			600,000
		(To record re-issue of treasury stock)

Table (6)

Working Notes:

Compute cash received.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Selling price per share}\\ \text{= 50,000 shares × \$10}\\ \text{= \$500,000}\end{array}$     

Compute treasury stock value.

$\begin{array}{c}\text{Treasury stock value= Number of shares }\times \text{ Purchase price per share}\\ \text{= 50,000 shares × \$12}\\ \text{= \$600,000}\end{array}$  

(2)

To determine

To Prepare:  stockholders’ equity section of balance sheet for Corporation N.

Explanation of Solution

Corporation N
Stockholders’ Equity Section
At the end of third quarter, September 30, 2016
Paid-in Capital	Amount ($)
Preferred stock, $5 par, authorized 1,000,000        shares, issued and outstanding 1,000,000        shares	5,000,000
Common stock, $1 par, authorized 5,000,000         shares, issued 3,000,000 shares, 2,900,000         shares outstanding	3,000,000
Paid-in capital–excess of par	42,000,000
Paid-in capital–share repurchase	50,000
Total paid-in capital	50,050,000
Retained earnings	4,000,000
Total paid-in capital and retained earnings	54,050,000
Less: Treasury stock	(1,200,000)
Total stockholders’ equity	$52,850,000

Table (7)

Working Notes:

Compute retained earnings value.

Particulars	Amount ($)
Balance on March 31, 2016	$1,000,000
Net income in third quarter	3,000,000
Balance on September 30, 2016	$4,000,000

Table (8)

Compute treasury stock value.

Particulars	Amount ($)
Treasury stock due to transaction on June 30, 2016	(2,400,000)
Treasury stock due to transaction on July 31, 2016	600,000
Treasury stock due to transaction on September 30, 2016	600,000
Balance on December 31, 2016	$(1,200,000)

Table (9)

Part C (Fourth quarter of corporation N):

(1)

To determine

To journalize: the transactions related to the declaration and payment of stock and cash dividends.

Explanation of Solution

On the date of declaration of cash dividend:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
November	1	Retained Earnings		540,000
		Dividends Payable, Common			290,000
		Dividends Payable, Preferred			250,000
		(To record declaration of cash dividends)

Table (10)

Working Notes:

Compute the amount of dividends payable, common.

$\begin{array}{c}\text{Dividend payable = Number of shares}\times \text{Dividend per share}\\ \text{= 5,800,000 shares}\times \text{\$0}\text{.50}\\ \text{= \$290,000}\end{array}$

Compute the amount of dividends payable, preferred.

$\begin{array}{c}\text{Dividend payable = Number of shares}\times \text{Dividend per share}\\ \text{= 1,000,000 shares}\times \text{\$0}\text{.25}\\ \text{= \$250,000}\end{array}$

On the date of record:

Do not record any entry for the transaction occurred on date of record for the following reasons:

• The dividends will not be paid for those who buy the stock after the date of record.
• The company does not record any transactions on the date of record.
• The ownership of shares alone is verified.

On the payment date of cash dividend:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
December	1	Dividends Payable, Common		290,000
		Dividends Payable, Preferred		250,000
		Cash			540,000
		(To record payment of dividends)

Table (11)

On the date of declaration of stock dividend:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
December	2	Retained Earnings		580,000
		Common Stock Distributable			29,000
		Paid-in Capital–Excess of Par			551,000
		(To record declaration of common stock dividend)

Table (12)

Working Notes:

Compute the stock dividends amount, which decreases the retained earnings.

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= 5,800,000 shares× }\frac{1}{\text{100}}\\ \text{= 58,000 shares}\end{array}$        

$\begin{array}{c}\text{Stock dividends = Stock dividend shares }\times \text{ Market value per share}\\ \text{= 58,000 shares × \$10}\\ \text{= \$580,000}\end{array}$

Compute common stock distributable value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Stock dividend shares }\times \text{ Par value of stock}\\ \text{= 58,000 shares × \$0}\text{.50}\\ \text{= \$29,000}\end{array}$          

Compute paid-in capital excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital }\\ \text{excess of par value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Stock dividends–}\\ \text{Common stock distributable value }\end{array}\right)\\ \text{= \$580,000 – \$29,000}\\ \text{= \$551,000}\end{array}$

On the date of settlement of stock dividend:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
December	28	Common Stock Distributable		29,000
		Common Stock			29,000
		(To record distribution of common stock dividend)

Table (13)

(2)

To determine

To Prepare: stockholders’ equity section of balance sheet for Corporation N as at December 31, 2016.

Explanation of Solution

Corporation N
Stockholders’ Equity Section
At the end of fourth quarter December 31, 2016
Paid-in Capital	Amount ($)
Preferred stock, $5 par, authorized 1,000,000         shares, issued and outstanding 1,000,000 shares	$5,000,000
Common stock, $0.50 par, authorized 5,000,000         shares, issued 6,058,000 and outstanding         5,858,000 shares	3,029,000
Paid-in capital–excess of par	42,551,000
Paid-in capital–share repurchase	50,000
Total paid-in capital	50,630,000
Retained earnings	5,380,000
Total paid-in capital and retained earnings	56,010,000
Deduct: Treasury stock	(1,200,000)
Total stockholders’ equity	$54,810,000

Table (14)

Working Notes:

Compute retained earnings value.

Particulars	Amount ($)
Balance on September 30, 2016	$4,000,000
Net income in fourth quarter	2,500,000
Retained earnings on November 1	(540,000)
Retained earnings on December 2	(580,000)
Balance on December 31, 2016	$5,380,000

Table (15)

Compute paid-in capital excess of par value.

Particulars	Amount ($)
Paid-in capital due to transaction on January 2, 2016	27,000,000
Paid-in capital due to transaction on January 2, 2016	15,000,000
Paid-in capital due to transaction on December 2, 2016	551,000
Balance on December 31, 2016	$42,551,000

Table (16)

(3)

To determine

To Prepare: statement of shareholders’ equity for 2016 for Corporation N.

Explanation of Solution

Corporation N
Statement of Shareholders’ Equity
For the Years Ended December 31, 2016
(Amounts in Thousands)
Particulars	Preferred Stock	Common Stock	Additional Paid-in Capital	Retained Earnings	Treasury Stock	Total Shareholders’ Equity
January 2, 2016	-	-	-	-	-	-
Issuance of preferred stock	5,000		15,000			20,000
Issuance of common stock		3,000	27,000			30,000
Purchase of treasury stock					(2,400)	(2,400)
Sale of treasury stock			50		1,200	1,250
Net income				6,500		6,500
Common cash dividends				(290)		(290)
Preferred stock dividends				(250)		(250)
Stock dividend		29	551	(580)		0
December 31, 2016	5,000	3,029	42,601	5,380	(1,200)	54,810

Table (17)