Financial accounting
Financial accounting
3rd Edition
ISBN: 9780077506902
Author: David J Spieceland Wayne Thomas Don Herrmann
Publisher: Mcgraw-Hill
Question
Book Icon
Chapter 10, Problem 10.2AP

1.

To determine

To record: The each transaction.

1.

Expert Solution
Check Mark

Explanation of Solution

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

Prepare the journal entry to record each of the transactions as follows:

Date Account Title and Explanation Debit ($) Credit($)
2015
March 1 Cash (1,100×$42) 46,200
Common stock (1,100×$0.01) 11
Additional paid in capital (difference) 46,189
(To record issuance of 1,100 shares of common stock for $42 per share)
May 15 Treasury stock (400×$35) 14,000
Cash 14,000
(To record the purchase of 400 shares of treasury stock)
July 10 Cash (200×$40) 8,000
Treasury stock (200×$35) 7,000
Additional paid in capital(difference) 1,000
(To record the reissue of treasury stock above the cost)
October 15 Cash (200×$45) 9,000
Preferred stock (200×$1) 200
Additional paid in capital (difference) 8,800
(To record issuance of 200 shares of preferred stock for $45 per share)
December 1 Dividends (5,400(1)×$0.5) 2,700
Dividends Payable 2,700
(To record the declaration of cash dividend)
December 31 Dividends Payable 2,700
Cash 2,700
(To record the payment of cash dividend)

Table (1)

Working note:

Compute the number of share outstanding as of December 1:

Details Number of shares Number of shares
Common shares 4,000
Add: Addition common stock issued 1,100
Total number of common stock 5,100
Preferred stock 300
Add: Addition preferred stock issued 200
Total number of preferred stock 500
Total number of stockholders’ 5,600
Less: Treasury stock held (400200) 200
Number of shares outstanding as of December 1 5,400(1)

Table (2)

2.

To determine

To indicate: The effect of each transaction on the total assets, total liabilities and total stockholders’ equity.

2.

Expert Solution
Check Mark

Answer to Problem 10.2AP

Effect of each transaction on the total assets, total liabilities and total stockholders’ equity is as follows:

Transaction Total assets Total liabilities Total stockholders’ equity
Issue common stock + NE +
Purchase treasury stock NE
Reissue treasury stock + NE +
Issue preferred stock + NE +
Declare cash dividend NE +
Pay cash dividend NE

Table (3)

Explanation of Solution

Explanation:

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

The following are the effect of each transaction on the total assets, total liabilities and total stockholders’ equity:

  • Issue of common stock increases cash and common stock, since cash is an asset account and common stock is a stockholders’ equity account, this transaction increases both asset and stockholders’ equity account.
  • Purchase of treasury stock decreases the cash since cash is paid to the shareholders to repurchase the shares which are already issued. When shares are repurchased it would be recorded as treasury stock. Treasury stock is a contra stockholders’ equity account. Hence, an increase in treasury stock decreases the stockholders’ equity account.
  • Reissue of treasury stock increases the cash since cash is received from the shareholders from the reissuance of stocks. When shares are reissued it would decreases the treasury stock. Treasury stock is a contra stockholders’ equity account. Hence, a decrease in treasury stock increases the stockholders’ equity account.
  • Issue of preferred stock increases cash and preferred stock, since cash is an asset account and preferred stock is a stockholders’ equity account, it increases both asset and stockholders’ equity account.
  • Declaration of cash dividend increases dividend and dividend payable. Dividend is a contra stockholder equity account, since dividend is paid out of retained earnings. Thus, an increase in dividend decreases the stockholder equity account. Dividend payable is a liability, which is increased at the time of dividend declaration.
  • Payment of cash dividend decreases the dividend payable account and cash account. Dividend payable is a liability, which will decrease when its liability of paying cash dividend is decreasing. Hence, a decrease in dividend payable decreases the liability. Cash is an asset account; hence a decrease in cash account decreases the asset account.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 10 Solutions

Financial accounting

Ch. 10 - Prob. 11RQCh. 10 - Prob. 12RQCh. 10 - How is the accounting for a repurchase of a...Ch. 10 - Prob. 14RQCh. 10 - Prob. 15RQCh. 10 - Prob. 16RQCh. 10 - Prob. 17RQCh. 10 - 18.What happens to the par value, the shares...Ch. 10 - Prob. 19RQCh. 10 - Prob. 20RQCh. 10 - Prob. 21RQCh. 10 - Prob. 22RQCh. 10 - Prob. 23RQCh. 10 - Prob. 10.1BECh. 10 - Prob. 10.2BECh. 10 - Record issuance of common stock (LO102) Western...Ch. 10 - Prob. 10.4BECh. 10 - Prob. 10.5BECh. 10 - Recognize preferred stock features (LO103) Match...Ch. 10 - Prob. 10.7BECh. 10 - Prob. 10.8BECh. 10 - Prob. 10.9BECh. 10 - Record cash dividends (LO105) Divine Apparel has...Ch. 10 - Prob. 10.11BECh. 10 - Prob. 10.12BECh. 10 - Indicate effects on total stockholders equity...Ch. 10 - Prepare the stockholders equity section (LO107)...Ch. 10 - Prob. 10.15BECh. 10 - Prob. 10.1ECh. 10 - Prob. 10.2ECh. 10 - Prob. 10.3ECh. 10 - Prob. 10.4ECh. 10 - Record common stock, preferred stock, and dividend...Ch. 10 - Prob. 10.6ECh. 10 - Prob. 10.7ECh. 10 - Record cash dividends (LO105) On March 15,...Ch. 10 - Prob. 10.9ECh. 10 - Record stock dividends and stock splits (LO106) On...Ch. 10 - Prob. 10.11ECh. 10 - Prob. 10.12ECh. 10 - Indicate effects on total stockholders equity...Ch. 10 - Prob. 10.14ECh. 10 - Prob. 10.15ECh. 10 - Prob. 10.16ECh. 10 - Prob. 10.1APCh. 10 - Prob. 10.2APCh. 10 - Indicate effect of stock dividends and stock...Ch. 10 - Prob. 10.4APCh. 10 - Prob. 10.5APCh. 10 - Prob. 10.6APCh. 10 - Prob. 10.7APCh. 10 - Match terms with their definitions (LO101 to 108)...Ch. 10 - Prob. 10.2BPCh. 10 - Prob. 10.3BPCh. 10 - Prob. 10.4BPCh. 10 - Prob. 10.5BPCh. 10 - Prob. 10.6BPCh. 10 - Prob. 10.7BPCh. 10 - Prob. 10.1APCPCh. 10 - Prob. 10.2APFACh. 10 - Prob. 10.3APFACh. 10 - Prob. 10.4APCACh. 10 - Ethics Put yourself in the shoes of a company...Ch. 10 - Written Communication Preferred stock has...Ch. 10 - Prob. 10.8APEM
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education