Chapter 10, Problem 10.11E

To determine

To prepare: The stockholders’ equity section of the balance sheet for PD Corporation as of December 31, 2018.

Answer to Problem 10.11E

Prepare the stockholders’ equity section of the balance sheet for PD Corporation as of December 31, 2018 as follows:

PD Corporation
Stockholders’ Equity Section
Paid-in Capital	Amount ($)	Amount ($)
Paid in capital
Common stock, $1 par value, 165,000 shares issued	165,000
Additional paid-in capital	9,480,000(1)
Total paid-in capital		9,645,000
Retained earnings		3,382,000(2)
Treasury stock, 3,000 shares		(195,000) (3)
Total stockholders’ equity		12,832,000

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.

Prepare journal entry to record the issuance of 10,000 shares of common stock for $35 per share.

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
March 1, 2018	Cash		4,030,000
	Common stock			65,000
	Additional paid-in capital			3,965,000
	(To record 65,000, $1 par value common stock issued at $62 per stock)

Table (1)

Working note:

Cash received is $\$4,030,000\left(65,000\text{ shares}\times \$62\text{ per share}\right)$

Common stock is $\$65,000\left(65,000\times \$1\text{ par value per share}\right)$

Additional paid-in capital is $\$3,965,000\left(\$4,030,000-\$65,000\right)$

Description:

• Cash is an asset. There is an increase in asset value. Therefore, it is debited.
• Common stock account and additional paid in capital are stockholders’ equity. There is an increase in stockholders’ equity value. Therefore, it is credited.

Prepare journal entry to record the repurchase of 6,000 shares of its own common stock for $65 per share.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
May 10, 2018	Treasury stock		390,000
	Cash $\left(6,000\times \$65\right)$			390,000
	(To record purchase of treasury stock)

Table (3)

Description:

• Treasury stock is a part of stockholders’ equity and stock holders’ equity decrease by purchase value of treasury stock. Therefore, it is debited
• Cash is assets. There is a decrease in assets value. Therefore, it is credited.

Prepare the journal entry to record the declaration of cash dividend.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
June 1, 2018	Dividends $\left(159,000\times \$2.00\right)$		$318,000
	Dividends payable			$318,000
	(To record the cash dividends declared)

Table (3)

• Cash dividend of $2.00 per share is declared to all the shareholders. Number of shares for which dividend declared are 159,000, which is calculated as follows:

  $\begin{array}{c}\begin{array}{l}\text{Number of shares}\\ \text{outstanding}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Number of shares outstanding at the beginning of 2018+}\\ \text{Number of additional shares issued at March 1 }-\\ \text{Number of shares repurchased at May 10}\end{array}\right]\\ =\text{100,000 shares + 65,000 shares }-\text{ 6,000 shares}\\ \text{=159,000 shares}\end{array}$

• Dividends are a stockholders’ equity account. There is a decrease in stockholders’ value of $390,000. Therefore, it is debited by $390,000.
• Dividends payables are liability. There is an increase in liability value of $390,000. Therefore, it is credited by 390,000.

Prepare the journal entry to record the payment of cash dividend.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
July 1, 2018	Dividends payable		$318,000
	Cash			$318,000
	(To record the payment of dividend)

Table (4)

• Dividends payables are liability. There is a decrease in liability value of $390,000. Therefore, it is debited.
• Cash is an asset. There is a decrease in asset value of $390,000. Therefore, it is credited.

Prepare journal entry to record the reissues of 5,500 shares of treasury stock at $45 per share.

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
October 21, 2018	Cash $\left(3,000\times \$70\right)$		$210,000
	Treasury Stock $\left(3,000\times \$65\right)$			195,000
	Additioanl Paid-in capital (difference)			15,000
	(To record the resale of treasury stock)

Table (4)

Description:

• Cash is an asset. It is increased as cash is received from the sale of treasury stock. Therefore, the cash account is credited with $210,000.
• Treasury stock is contra-stockholders’ equity account with a normal debit balance. Thus, when treasury stocks are sold at its cost price, then cash would be debited and treasury stock would be credited. But, when treasury stocks are sold for higher than its cost price, then cash would be debited and treasury stock would be credited for cost price, and paid-in capital from treasury stock would be credited for excess selling price over the purchase price.

Now calculate the total additional paid in capital as follows:

Additional paid in capital as on January 1, 2018	$5,500,000
Additional paid in capital raised from additional issue of 65,000 common shares	$3,965,000
Additional paid in capital raised from reissue of treasury stock	$15,000
Total Additional paid in capital as on December 31, 2018	(1) $9,480,000

Now calculate total amount of retained earnings as follows:

$\begin{array}{c}\text{Retained earnings }=\left(\begin{array}{l}\left(\begin{array}{l}\text{Beginning retained earnings }+\\ \text{Net income}\end{array}\right)-\\ \text{Dividends payable}\end{array}\right)\\ =\left(\$3,000,000+\$700,000\right)-\$318,000\\ =\$3,700,000-\$318,000\\ =\$3,382,000\end{array}$ (2)

Now, calculate the par value of 3,000 treasury stock:

$\begin{array}{c}\text{ Par value }=\text{No of shares }\times \text{ Par value}\\ =3,000\times \$65.00\\ =\$195,000\end{array}$ (3)