Chapter 21, Problem 1CP

CHALLENGE PROBLEM

This problem challenges you to apply your cumulative accounting knowledge to move a step beyond the material in the chapter.

LeeJin Corp. started a two-year period with 200,000 shares of $2 par common stock outstanding. During the two years, LeeJin had the following capital stock transactions:

(a) Declared a 10% common stock dividend. The market value of the common stock was estimated at $8 per share.

(b) Declared a cash dividend of $0.20 per share on common stock.

(c) Declared a 30% common stock dividend. The market value of the common stock was estimated at $9 per share.

(d) Declared a cash dividend of $0.20 per share on common stock.

(e) Declared a two-for-one stock split.

(f) Declared a cash dividend of $0.16 per share on common stock.

REQUIRED

1. Prepare general journal entries for each of the transactions. Identify each transaction by the appropriate letter. (Assume that any cash or share distributions have been completed and are a matter of record before the next transaction occurs.)

2. Compute the following:

(a) Number of shares of common stock outstanding after all the transactions have been completed.

(b) The par value per share of LeeJin’s common stock after all the transactions have been completed.

To determine

Journalize the transactions in the books of Corporation L.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the given transactions in the books of Corporation L.

Transaction (a):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
		Stock Dividends			160,000
			Stock Dividends Distributable			40,000
			Paid-In Capital in Excess of Par–Common Stock			120,000
		(Record declaration of stock dividends)

Table (1)

Description:

• Stock Dividends is a contra-stockholders’ equity temporary account. This account decreases stockholders’ equity and is closed to Retained Earnings account as the common stock is issued. So, the account is debited.
• Stock Dividends Distributable is a stockholders’ equity account. Since common stock is declared to be issued as stock dividends, at par value, equity value is increased. An increase in equity is credited.
• Paid-In Capital in Excess of Par–Common Stock is a stockholders’ equity account. Since the stock is issued in excess of par value, equity value is increased. An increase in equity is credited.

Working Notes:

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

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= 200,000 shares × 10\%}\\ \text{= 20,000 shares}\end{array}$ (1)

Compute amount of stock dividends (Refer to Equation (1) for stock dividend shares value).

$\begin{array}{c}\text{Stock dividends = Stock dividend shares }\times \text{ Market value per share}\\ \text{= 20,000 shares × \$8}\\ \text{= \$160,000}\end{array}$ (2)

Compute the amount of stock dividends distributable (Refer to Equation (1) for stock dividend shares value).

$\begin{array}{c}\begin{array}{l}\text{Stock dividends }\\ \text{distributable value}\end{array}\}\text{ = Stock dividend shares }\times \text{ Par value of stock}\\ \text{= 20,000 shares × \$2}\\ \text{= \$40,000}\end{array}$ (3)

Compute paid-in capital in excess of par-common stock (Refer to Equations (2) and (3) for stock dividends and stock dividends distributable value).

$\begin{array}{c}\text{Paid-in capital = Stock dividends –Stock dividends distributable value}\\ \text{= \$160,000 – \$40,000}\\ \text{= \$120,000}\end{array}$

Transaction (b):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
		Cash Dividends			44,000
			Common Dividends Payable			44,000
		(Record declaration of common dividends)

Table (2)

Description:

• Cash Dividends is a contra-capital temporary account. This account decreases stockholders’ equity and is closed as the dividends are paid off. So, the account is debited.
• Common Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute amount of common dividends declared.

$\begin{array}{c}\text{Dividend declared = }\left(\begin{array}{l}\text{Number of shares outstanding+}\\ \text{Stock dividend shares}\end{array}\right)\text{×Dividend per share}\\ \text{=}\left(\text{200,000+20,000}\right)\text{ shares ×\$0}\text{.20}\\ \text{= 220,000 shares ×\$0}\text{.20}\\ \text{= \$44,000}\end{array}$

Transaction (c):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
		Stock Dividends			132,000
			Stock Dividends Distributable			132,000
		(Record declaration of stock dividends)

Table (3)

Description:

• Stock Dividends is a contra-stockholders’ equity temporary account. This account decreases stockholders’ equity and is closed to Retained Earnings account as the common stock is issued. So, the account is debited.
• Stock Dividends Distributable is a stockholders’ equity account. Since common stock is declared to be issued as stock dividends, at par value, equity value is increased. An increase in equity is credited.

Working Notes:

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

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Number of shares outstanding+}\\ \text{Stock dividend shares}\end{array}\right)\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= }\left(\text{200,000+20,000}\right)\text{ shares × 30\%}\\ \text{=220,000 shares × 30\%}\\ \text{= 66,000 shares}\end{array}$ (4)

Compute the amount of stock dividends distributable (Refer to Equation (4) for stock dividend shares value).

$\begin{array}{c}\begin{array}{l}\text{Stock dividends }\\ \text{distributable value}\end{array}\}\text{ = Stock dividend shares }\times \text{ Par value of stock}\\ \text{= 66,000 shares × \$2}\\ \text{= \$132,000}\end{array}$

Transaction (d):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
		Cash Dividends			57,200
			Common Dividends Payable			57,200
		(Record declaration of common dividends)

Table (4)

Description:

• Cash Dividends is a contra-capital temporary account. This account decreases stockholders’ equity and is closed as the dividends are paid off. So, the account is debited.
• Common Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute amount of common dividends declared.

$\begin{array}{c}\text{Dividend declared = }\left(\begin{array}{l}\text{Number of shares outstanding+}\\ \text{Stock dividend shares}\end{array}\right)\text{×Dividend per share}\\ \text{=}\left(\text{200,000+20,000+66,000}\right)\text{ shares ×\$0}\text{.20}\\ \text{= 286,000 shares ×\$0}\text{.20}\\ \text{= \$57,200}\end{array}$

Transaction (e):

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Memorandum entry: Declared a 2-for-1 stock split. Issued 572,000 shares of $1.00 par common stock in exchange for 66,000 shares of $2.00 par common stock.

Table (5)

Working Notes:

Compute the number of shares after stock split.

$\begin{array}{c}\begin{array}{l}\text{Total number of shares }\\ \text{after stock-split}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Total number of shares outstanding }\\ \text{before stock split × Stock split}\end{array}\right)\\ \text{= }\left(\text{200,000+20,000+66,000}\right)\text{ shares × }\frac{2}{1}\\ =286,000\text{ shares × }\frac{2}{1}\\ \text{= 572,000 shares}\end{array}$ (5)

Compute the par value of shares after stock split.

$\begin{array}{c}\text{Par value of shares after stock split = }\frac{\text{Par value before stock split}}{\text{Stock split rate}}\\ \text{= }\frac{\text{\$2}}{\frac{2}{1}}\\ =\$2\times \frac{1}{2}\\ \text{= \$1}\text{.00}\end{array}$

Transaction (f):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
		Cash Dividends			91,520
			Common Dividends Payable			91,520
		(Record declaration of common dividends)

Table (6)

Description:

• Cash Dividends is a contra-capital temporary account. This account decreases stockholders’ equity and is closed as the dividends are paid off. So, the account is debited.
• Common Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute amount of common dividends declared.

$\begin{array}{c}\text{Dividend declared = }\left(\text{Number of shares outstanding}\right)\text{×Dividend per share}\\ \text{= 572,000 shares ×\$0}\text{.16}\\ \text{= \$91,520}\end{array}$

Note: Refer to Equation (5) for value and computation of 572,000 shares.

To determine

Ascertain the number of shares of common stock after the completion of all transactions.

Explanation of Solution

Common stock: Common stock is the cash raised by the company by issuing common or ordinary shares to the stockholders. This is an investment for the shareholders for which they receive the dividends from the issuing company, and have voting rights.

Ascertain the number of shares of common stock after the completion of all transactions.

$\begin{array}{c}\begin{array}{l}\text{Total number}\\ \text{of shares }\end{array}\}\text{ = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Number of shares outstanding+}\\ \text{Stock dividend shares declared in transaction (a)+}\\ \text{ Stock dividend shares declared in transaction (c)}\end{array}\right)\text{× }\\ \text{Stock split}\end{array}\right\}\\ \text{= }\left(\text{200,000+20,000+66,000}\right)\text{ shares × }\frac{2}{1}\\ =286,000\text{ shares × }\frac{2}{1}\\ \text{= 572,000 shares}\end{array}$

Conclusion

Hence, total number of shares after the completion of all transactions is 572,000 shares.

To determine

Ascertain the par value of shares of common stock after the completion of all transactions.

Explanation of Solution

Par value: The corporation charter assigns and allocates the dollar value for its share which is referred to as par value.

Ascertain the par value of shares of common stock after the completion of all transactions.

$\begin{array}{c}\text{Par value of shares after stock split = }\frac{\text{Par value before stock split}}{\text{Stock split rate}}\\ \text{= }\frac{\text{\$2}}{\frac{2}{1}}\\ =\$2\times \frac{1}{2}\\ \text{= \$1}\text{.00}\end{array}$

Conclusion

Hence, par value of shares after the completion of all transactions is $1.00.