Chapter 21, Problem 9SPA

To determine

Journalize the given transactions in the books of Company C.

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 Company C.

Transaction on April 15:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
April	15	Cash Dividends			41,000
			Preferred Dividends Payable			9,000
			Common Dividends Payable			32,000
		(Record declaration of preferred  and common dividends)

Table (1)

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.
• Preferred Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.
• 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 preferred dividends declared.

$\begin{array}{c}\text{Dividend declared = Number of shares ×Dividend per share}\\ \text{= 6,000 shares ×\$1}\text{.50}\\ \text{= \$9,000}\end{array}$ (1)

Compute amount of common dividends declared.

$\begin{array}{c}\text{Dividend declared = Number of shares ×Dividend per share}\\ \text{= 80,000 shares ×\$0}\text{.40}\\ \text{= \$32,000}\end{array}$ (2)

Transaction on May 10:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
May	10	Preferred Dividends Payable			9,000
		Common Dividends Payable			32,000
			Cash			41,000
		(Record payment of dividends)

Table (2)

Description:

• Preferred Dividends Payable is a liability account. Since the liability to pay dividends has been paid off, liability decreased, and a decrease in liability is debited.
• Common Dividends Payable is a liability account. Since the liability to pay dividends has been paid off, liability decreased, and a decrease in liability is debited.
• Cash is an asset account. The amount is decreased because cash is paid as dividends, and a decrease in assets should be credited.

Note: Refer to Equations (1) and (2) for the value and computation preferred and common dividends.

Transaction on October 15:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
October	15	Cash Dividends			41,000
			Preferred Dividends Payable			9,000
			Common Dividends Payable			32,000
		(Record declaration of preferred  and common dividends)

Table (3)

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.
• Preferred Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.
• 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 preferred dividends declared.

$\begin{array}{c}\text{Dividend declared = Number of shares ×Dividend per share}\\ \text{= 6,000 shares ×\$1}\text{.50}\\ \text{= \$9,000}\end{array}$ (3)

Compute amount of common dividends declared.

$\begin{array}{c}\text{Dividend declared = Number of shares ×Dividend per share}\\ \text{= 80,000 shares ×\$0}\text{.40}\\ \text{= \$32,000}\end{array}$ (4)

Transaction on November 20:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
November	20	Preferred Dividends Payable			9,000
		Common Dividends Payable			32,000
			Cash			41,000
		(Record payment of dividends)

Table (4)

Description:

• Preferred Dividends Payable is a liability account. Since the liability to pay dividends has been paid off, liability decreased, and a decrease in liability is debited.
• Common Dividends Payable is a liability account. Since the liability to pay dividends has been paid off, liability decreased, and a decrease in liability is debited.
• Cash is an asset account. The amount is decreased because cash is paid as dividends, and a decrease in assets should be credited.

Note: Refer to Equations (3) and (4) for the value and computation preferred and common dividends.

Transaction on November 22:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
November	22	Stock Dividends			56,000
			Stock Dividends Distributable			8,000
			Paid-In Capital in Excess of Par–Common Stock			48,000
		(Record declaration of stock dividends)

Table (5)

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.

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= 80,000 shares × 10\%}\\ \text{= 8,000 shares}\end{array}$ (5)

Compute amount of stock dividends (Refer to Equation (5) for stock dividend shares value).

$\begin{array}{c}\text{Stock dividends = Stock dividend shares }\times \text{ Market value per share}\\ \text{= 8,000 shares × \$7}\\ \text{= \$56,000}\end{array}$ (6)

Compute the amount of stock dividends distributable (Refer to Equation (5) for stock dividend shares value).

$\begin{array}{c}\begin{array}{l}\text{Stock dividends }\\ \text{distributable value}\end{array}\}\text{ = Stock dividend shares }\times \text{ Par value of stock}\\ \text{= 8,000 shares × \$1}\\ \text{= \$8,000}\end{array}$ (7)

Compute paid-in capital in excess of par-common stock (Refer to Equations (6) and (7) for stock dividends and stock dividends distributable value).

$\begin{array}{c}\text{Paid-in capital = Stock dividends –Stock dividends distributable value}\\ \text{= \$56,000 – \$8,000}\\ \text{= \$48,000}\end{array}$

Transaction on December 16:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
December	16	Stock Dividends Distributable			8,000
			Common Stock			8,000
		(Record issue of stock dividends in the form of common stock)

Table (6)

Description:

• Stock Dividends Distributable is a stockholders’ equity account. Since common stock is issued due to declaration of stock dividends, the value is transferred to common stock, the equity value is decreased. A decrease in equity is debited.
• Common Stock is a stockholders’ equity account. Since common stock is issued, equity value is increased. An increase in equity is credited.

Note: Refer to Equation (7) for value and computation of stock dividends distributable value.

Transaction on December 20:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
20--
December	20	Memorandum entry: Declared a 2-for-1 stock split. Issued 176,000 shares of $0.50 par common stock in exchange for 88,000 shares of $1 par common stock.

Table (7)

Working Notes:

Compute the number of shares after stock split on December 20.

$\begin{array}{c}\begin{array}{l}\text{Total number of shares }\\ \text{after stock-split}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Total number of shares outstanding }\\ \text{before stock split × Stock split}\end{array}\right)\\ =\left(\begin{array}{l}\left(\begin{array}{l}\text{Number of shares outstanding+}\\ \text{Number of stock dividend shares}\end{array}\right)\\ \text{ × Stock split}\end{array}\right)\\ \text{= }\left(\text{80,000+8,000}\right)\text{shares × }\frac{2}{1}\\ \text{= 176,000 shares}\end{array}$

Compute the par value of shares after stock split.

$\begin{array}{c}\text{Par value of shares after stock split = }\frac{\text{Par value before stock split}}{\text{Stock split rate}}\\ \text{= }\frac{\text{\$1}}{\frac{2}{1}}\\ =\$1\times \frac{1}{2}\\ \text{= \$0}\text{.50}\end{array}$