Chapter 8, Problem 23P

Problem 8-23 Recording and reporting stock transactions and cash dividends across two accounting cycles

Sun Corporation received a charter that authorized the issuance of 100,000 shares of $10 par common stock and 50,000 shares of $50 par, 5 percent cumulative preferred stock. Sun Corporation completed the following transactions during its first two years of operation:

2018

Jan. 5 Sold 6,000 shares of the $10 par common stock for $15 per share.

12 Sold 1,000 shares of the 5 percent preferred stock for $55 per share.

Apr. 5 Sold 30,000 shares of the $10 par common stock for $21 per share.

Dec. 31 During the year, earned $150,000 in cash revenue and paid $88,000 for cash operating expenses.

31 Declared the cash dividend on the outstanding shares of preferred stock for 2018. The dividend will be paid on February 15 to stockholders of record on January 10, 2019.

2019

Feb. 15 Paid the cash dividend declared on December 31, 2018.

Mar. 3 Sold 15,000 shares of the $50 par preferred stock for $53 per share.

May 5 Purchased 900 shares of the common stock as treasury stock at $24 per share.

Dec. 31 During the year, earned $210,000 in cash revenues and paid $98,000 for cash operating expenses.

31 Declared the annual dividend on the preferred stock and a $0.50 per share dividend on the

common stock.

Required

1. a. Organize the transaction data in accounts under an accounting equation.
2. b. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018.
3. c. Prepare the balance sheet at December 31, 2019.

To determine

Organize the transactions data in accounts under an accounting equation..

Explanation of Solution

Organize the transactions data in accounts under an accounting equation:

Table (1)

Working note:

1. Calculate the preferred dividend amount of dividend declared in 2018.

1, 000, 5% preferred shares are outstanding at $50 par.

$\begin{array}{c}\begin{array}{l}\text{Cash dividend declared}\\ \text{for preferred stock in 2018}\end{array}\}=\left[\begin{array}{l}\text{Outstanding number of preferred shares}\times \\ \text{Percentage of dividend}\times \text{Par value per share}\end{array}\right]\\ =\left[\left(1,000\text{shares}\right)\times 5\%\times \$50\right]\\ =\$2,500\end{array}$

2. Calculate the amount of total dividend declared in 2019.

First calculate the amount of cash dividend declared for preferred stock in 2019:

$\begin{array}{c}\begin{array}{l}\text{Cash dividend declared}\\ \text{for preferred stock in 2019}\end{array}\}=\left[\begin{array}{l}\text{Outstanding number of preferred shares}\times \\ \text{Percentage of dividend}\times \text{Par value per share}\end{array}\right]\\ =\left[\left(1,000+15,000\text{ shares}\right)\times 5\%\times \$50\right]\\ =\$40,000\end{array}$

Then calculate the amount of cash dividend declared for common stock in 2019:

$\begin{array}{c}\begin{array}{l}\text{Cash dividend declared}\\ \text{for common stock in 2019}\end{array}\}=\left[\begin{array}{l}\text{Outstanding number of common shares}\times \\ \text{Amount of dividend declared}\end{array}\right]\\ =\left[\left(\begin{array}{l}6,000\text{ shares}\text{+}\text{30,000 shares }-\\ 900\text{shares}\end{array}\right)\times 0.50\right]\\ =\$17,550\end{array}$

Now, calculate the amount of total dividend declared in 2019:

$\begin{array}{c}\text{Total dividend declared in 2019 = }\left[\begin{array}{l}\text{Cash dividend declared for preferred stock in 2019+}\\ \text{Cash dividend declared for common stock in 2019}\end{array}\right]\\ =\$40,000+\$17,550\\ =\$57,550\end{array}$

To determine

Prepare the stockholders’ equity section of the balance sheet at December 31, 2018.

Explanation of Solution

Stockholders’ equity section: It is a part of the balance sheet. It reports the stockholders’ equity balances as on the balance sheet date.

Prepare the stockholders’ equity section of the balance sheet at December 31, 2018:

Corporation S
December 31, 2018
Particulars	Amount  ($)	Amount  ($)
Stockholders’ Equity:
Preferred Stock, $50 par value, 5%  cumulative, 50,000 shares authorized,  1,000 shares issued and outstanding	$50,000
Common Stock, $10 par value, 100,000 shares authorized, 36,000 shares issued and outstanding	360,000
Paid-In Capital in Excess of Par-Preferred Stock	5,000
Paid-In Capital in Excess of Par-Common Stock	360,000
Total Paid-In Capital	775,000
Retained Earnings	59,500
Total Stockholders’ Equity		$834,500

Table (2)

To determine

Prepare the balance sheet at December 31, 2019.

Explanation of Solution

Balance sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet at December 31, 2019:

Corporation S
Balance Sheet
As of December 31, 2019
Assets	Amount	Amount
Cash	$1,719,900
Total Assets		$1,719,900
Liabilities and stockholders' equity
Liabilities:
Dividends Payable	$57,550
Total Liabilities		$57,550
Stockholders’ Equity:
Preferred Stock, $50 par value, 5%  cumulative, 50,000 shares authorized,  16,000 shares issued and outstanding	$800,000
Common Stock, $10 par value, 100,000 shares authorized, 36,000 shares issued and 35,100 (3) outstanding	360,000
Paid-In Capital in Excess of Par-Preferred Stock	50,000
Paid-In Capital in Excess of Par-Common Stock	360,000
Total Paid-In Capital	1,570,000
Retained Earnings	113,950
Less: Treasury stock	(21,600)
Total Stockholders’ Equity		1,662,350
Total Liabilities and Stockholders’ Equity		$1,719,900

Table (5)

Working note:

3. Determine the number of shares has been issued and outstanding at the end of 2018 and 2019.

Schedule of Number of Shares of Common Stock
	Shares Issued	Shares Outstanding
2018
January 5	6,000	6,000
April 5	30,000	30,000
Totals	36,000	36,000
2019
May 5		(900)
Totals	36,000	35,100

Table (5)