Chapter 11, Problem 11.1COP

COMPREHENSIVE PROBLEM

Financial Reporting of Write-off, Bond Issuance and Common Stock Issuance, Purchase, Reissuance, and Cash Dividends (Chapters 8, 10 and 11)

American Laser, Inc., reported the following account balances on January 1.

Accounts Receivable	$ 5,000
Accumulated Depreciation	30,000
Additional Paid-in Capital	90,000
Allowance for Doubtful Accounts	2,000
Bonds Payable	0
Buildings	247,000
Cash	10,000
Common Stock, 10,000 shares of $1 par	10,000
Notes Payable (long-term)	10,000
Retained Earnings	120,000
Treasury Stock	0

The company entered into the following transactions during the year.

Jan. 15	Issued 5,000 shares of $1 par common stock for $50,000 cash.
Feb. 15	Reacquired 3.000 shares of $1 par common stock into treasury for $33,000 cash.
Mar. 15	Reissued 2,000 shares of treasury stock for $24,000 cash.
Aug. 15	Reissued 600 shares of treasury stock for $4,600 cash.
Sept. 15	Declared (but did not yet pay) a $1 cash dividend on each outstanding share of common stock.
Oct. 1	Issued 100, 10-year, $1,000 bonds, at a quoted bond price of 101.
Oct. 3	Wrote off a $500 balance due from a customer

Required:

1. 1. Analyze the effects of each transaction on total assets, liabilities, and stockholders’ equity.
2. 2. Prepare journal entries to record each transaction.
3. 3. Enter the January 1 balances into T-accounts, post the journal entries from requirement 2, and determine ending balances.
4. 4. Prepare the noncurrent liabilities and stockholders’ equity sections of the balance sheet at December 31. At the end of the year, the adjusted net income was $20,000.
5. 5. Prepare the closing entry for Dividends.

To determine

To Analyze: the effect of each transaction on total assets, liabilities and stockholder’s equity.

Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

$\begin{array}{l}\boxed{\text{Assets = Liabilities + Shareholders Equity}}\hfill \\ \hfill \end{array}$

Date of Transaction	Balance Sheet
	Assets	Liabilities	Stockholder’s Equity
January 15	Cash $+$50,000	NE	Common Stock $+$5,000 Additional paid –in capital $+$45,000
February 15	Cash $-$33,000	NE	Treasury stock ( $+$ xSE) $-$33,000
March 15	Cash $+$24,000	NE	Treasury stock ( $-$ xSE) $+$22,100 Additional paid –in capital $+$2,000
August 15	Cash $+$4,600	NE	Treasury stock ( $-$ xSE) $+$6,600 Additional paid –in capital $-$ 2,000
September 15	NE	Dividends payable $+$14,600	Dividends ( $+$ D) $-$14,600
October 1	Cash $+$ 101,000	Bonds payable $+$100,000 Premium on bonds payable $+$1,000
October 3	AR $-$ 500 AFDA $+$ 500

(Table 1)

Note:

• $+$: Denotes increase in the value
• $-$: Denotes increase in the value
• NE: Denotes increase in the value
• AR: Accounts Receivable
• AFDA: Allowance for Doubtful Accounts( $+$ xA)

To determine

To Prepare: journal entries to record each transaction.

Explanation of Solution

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 15	Cash	50,000
	Common stock		5,000
	Additional paid –in capital		45,000
	(To record the issuance of  common stock)
February 15	Treasury stock	33,000
	Cash		33,000
	(To record repurchase of common stock into  treasury stock )
March 15	Cash	24,000
	Treasury Stock(2)		22,000
	Additional paid –in capital		2,000
	(To record the reissuance of treasury stock)
August 15	Cash	4,600
	Additional paid-in capital	2,000
	Treasury stock(3)		6,600
	(To record the reissuance of 600 shares of  treasury stock)
September 15	Dividends (5)	14,600
	Dividends Payable		14,600
	(To record the sale of merchandise on account)
October 1	Cash(6)	101,000
	Bonds Payable(7)		100,000
	Premium on bonds payable		1,000
	(To record the issuance of bonds at a quoted bond price $101)
October 3	Allowance for doubtful accounts	500
	Accounts Receivable		500
	(To record the written off balance due from customer)

Table (2)

Working Notes:

$\begin{array}{c}\text{Share price of a treasury stock = }\frac{\text{Purchase of teasury stock for cash }}{\text{No of shares purchased}}\\ =\text{}\frac{\$33,000}{3,000}\\ =\$11\end{array}$ (1)

$\begin{array}{c}\text{Reissuance of treasury stock = Shares issued }\times \text{ Share price}\\ \text{= 2,000 shares }\times \text{ \$11 (1)}\\ \text{= \$22,000}\end{array}$ (2)

$\begin{array}{c}\begin{array}{l}\text{Reissuance of treasury}\\ \text{ on August 15}\end{array}\}=\text{ Shares issued }\times \text{ Share price}\\ \text{= 600 shares }\times \text{ \$11}\\ \text{= \$6,600}\end{array}$ (3)

$\begin{array}{c}\left(\begin{array}{l}\text{Treasury shares excluded }\\ \text{from dividends payable}\end{array}\right)\text{= Treasury issed on february 15 }-\text{ Treasury issed on March 15}\\ \text{= 3,000 }-2,600\text{ (2,000+600)}\\ \text{= 400}\end{array}$ (4)

$\begin{array}{c}\text{Dividends = Price of cash dividend }\times \left[\begin{array}{l}\text{Common shares issues at the beginning+ }\\ \text{additional }-\text{Treasury shares (4)}\end{array}\right]{\displaystyle \sum _{i=1}^n{X}_i^2}\\ =\$1\times \left[10,000+5000-400\right]\\ =\$14,600\end{array}$ (5)

$\begin{array}{c}\text{Cash paid on Bonds payable= Shares issused }\times \text{ Bonds price}\\ =\text{101 }\times \text{ \$1,000}\\ \text{= \$101,000}\end{array}$ (6)

$\begin{array}{c}\text{Bonds Payable = Shares issused }\times \text{ Bonds price}\\ =\text{100 }\times \text{ \$1,000}\\ \text{= \$100,000}\end{array}$ (7)

To determine

To Record: the January 1 balance and journal entries made for each transaction into T-accounts

Explanation of Solution

Cash  (A)
Bal	10,000
15-Jan	50,000	33,000	15 Feb
15-Mar	24,000
15-Aug	4,600
1- Oct	101,000
	156,600

Accounts Receivable (A)
Bal.	5,000
		500	3-Oct
	4,500

Buildings
Bal.	247,000
	247,000

Allowance for Doubtful Accounts  (xA)
3-Oct	500	2,000	Bal.
		1,500

Accumulated Dep.–Building(xA)
		30,000	Bal.
		30,000

Dividends Payable  (L)
		0	Bal.
		14,600	15-Sep
		14,600

Notes Payable  (L)
		10,000	Bal.
		10,000

Bonds Payable  (L)
		0	Bal.
		100,000	1-Oct
		100,000

Premium on Bonds Payable  (-L)
		0	Bal.
		1,000	1-Oct
		1,000

Common Stock (SE)
		10,000	Bal.
		5,000	15-Jan
		15,000

Additional Paid-In Capital (SE)
		90,000	Bal.
		45,000	15-Jan
15-Aug	2,000	2,000	15-Mar
		135,000

Treasury Stock (xSE)
Bal.	0
15-Feb	33,000	22,000	15-Mar
		6,600	15-Aug
	4,400

Dividends (D)
Bal.	0
15-Sep	14,600
	14,600

Retained Earnings (SE)
		120,000	Bal.
		120,000

To determine

To Prepare: the noncurrent liabilities and stockholder’s equity sections of the balance sheet at December 31.

Explanation of Solution

Prepare the noncurrent liabilities and stockholder’s equity sections of the balance sheet at December 31.

Liabilities (excerpt)
Particulars	Amount in $
Noncurrent Liabilities:
Notes Payable	10,000
Bonds Payable	100,000
Premium on Bonds Payable	1,000
Total Noncurrent Liabilities	111,000

(Table 3)

Stockholders’ Equity
Particulars	Amount in $	Amount in $
Contributed Capital:
Common Stock, par $1, issued 15,000 shares, of which 400 shares are held as treasury stock		15,000
Additional Paid-in Capital		135,000
Total Contributed Capital		150,000
Retained Earnings(8)		125,400
Total		275,400
Less: Treasury Stock, at cost		(4,400)
Total Stockholders’ Equity		271,000

(Table 4)

Working Notes:

$\begin{array}{c}\text{Closing Retained Earnings = Opening balance+ Net Income }-\text{Cash Dividends}\\ \text{= \$120,000+20,000}-14,600\\ =\$125,400\end{array}$ (8)

To determine

To Prepare: the closing entry for dividends.

Explanation of Solution

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31	Retained Earnings	14,600
	Dividends (5)		14,600
	(To record the closing entry of dividends)

(Table 5)

• Retained earnings are a component of stockholder’s equity and there is a decrease in the value of equity. Hence, it is debited.
• Dividend is a component of stockholder’s equity and there is an increase in the value of dividend. Hence, it is credited.