Concept explainers
It is that part of the company's liabilities that are used to finance the operations of the business. They are the owner of the business. It generally has two types one is common stock and other is
Journal Entries:
It is a book of original entry. It records and summarizes financial transaction of an entity in chronological manner, generally according to dual aspect of accounting.
Accounting rules regarding journal entries:
- Balance increase when: Assets, losses and expenses get debited and liabilities, gains, and revenue get credited.
- Balance decrease when: Assets, losses and expenses get credited and liabilities, gains, and revenue get debited.
It is the type of stock that company keeps with itself either by not issuing the shares or by buying back of shares.
1.
To prepare:
Explanation of Solution
Prepare journal entries:
Treasury stock is purchased.
Date | Account Title and | Post ref | Debit($) | Credit($) |
Jan 1 | Treasury stocks | 80,000 | ||
Cash | 80,000 | |||
(Being treasury stocks is purchased ) |
Table (1)
- Treasury stocks are equity. Since, own equity is purchased, it reduces equity. Hence, debit treasury stocks account.
- Cash is an asset. Since, cash is used to purchase treasury stock, it reduces asset. Hence credit cash account.
Declared a cash dividend payable:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 5 | Retained earnings | 72,000 | ||
Dividend payable | 72,000 | |||
(Being dividend is declared and it became a liability ) |
Table (2)
- Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit retained earnings account
- Dividend payable is a liability. Since, dividend is an expense but not paid yet, it increases liability. Hence, credit dividend payable account.
Dividend paid which was declared on Jan 5.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Feb 28 | Dividend payable | 72,000 | ||
Cash | 72,000 | |||
(Being dividend is paid ) |
Table (3)
- Common stock dividend payable is a liability. Since, dividend is paid, it decreases liability. Hence, debit common stock dividend payable account.
- Cash is an asset. Since, cash is used to pay dividend, it reduces asset. Hence credit cash account.
Some of the treasury stock reissued.
Date | Account Title and | Post ref | Debit($) | Credit($) |
July 6 | Cash | 36,000 | ||
Treasury stocks | 30,000 | |||
Paid in capital in excess of par value, treasury stock | 6,000 | |||
(Being dividend is paid ) |
Table (4)
- Cash is an asset. Since, cash is received, it increases asset. Hence debit cash account.
- Treasury stock is equity. Since, shares is issued, it increases equity. Hence, credit treasury stock account.
- Paid in capital in excess of par value, treasury stock is part of a shareholder’s fund. Since, money is received, it increases equity. Hence, credit paid in capital in excess of par value, treasury stock.
Some of the treasury stock reissued.
Date | Account Title and | Post ref | Debit($) | Credit($) |
Aug 22 | Cash | 42,500 | ||
Paid in capital in excess of par value, treasury stock | 6,000 | |||
Retained Earnings | 1,500 | |||
Treasury stocks | 50,000 | |||
(Being dividend is paid ) |
Table (5)
- Cash is an asset. Since, cash is received, it increases asset. Hence debit cash account.
- Paid in capital in excess of par value, treasury stock is part of a shareholder’s fund. Since, money is used, it decreases equity. Hence, debit paid in capital in excess of par value, treasury stock.
- Retained earnings are a part of equity. Since, shares is issued at below face value, it create loss and reduces equity. Hence, debit retained earnings account.
- Treasury stock is equity. Since, shares is issued, it increases equity. Hence, credit treasury stock account.
Declared a cash dividend payable:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Sep 5 | Retained earnings | 80,000 | ||
Dividend payable | 80,000 | |||
(Being dividend is declared and it became a liability ) |
Table (6)
- Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit retained earnings account
- Dividend payable is a liability. Since, dividend is an expense but not paid yet, it increases liability. Hence, credit dividend payable account.
Dividend paid which was declared on Sep 5.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Oct 28 | Dividend payable | 80,000 | ||
Cash | 80,000 | |||
(Being dividend is paid ) |
Table (7)
- Common stock dividend payable is a liability. Since, dividend is paid, it decreases liability. Hence, debit common stock dividend payable account.
- Cash is an asset. Since, cash is used to pay dividend, it reduces asset. Hence credit cash account.
Income Summary transfer to retained earnings account for closing:
Date | Particulars | Post ref | Debit($) | Credit($) |
Dec 31 | Income Summary | 388,000 | ||
Retained Earning | 388,000 | |||
(Being net income transfer to retained earnings) |
Table (8)
- Income summary is a temporary account. Since, it is used for transferring net income summary to retained account. Hence, debit income summary account.
- Retained earnings come under stockholder’s equity. Since, retained earning has increased. Hence, credit retained earning account.
Prepare retained earnings statement.
K. Company | |
Retained Earnings Statement | |
For the year ended December 31, 2017 | |
Particulars | Amount($) |
Opening balance | 270,000 |
Net income | 388,000 |
Dividends | (152,000) |
Treasury stock | (1,500) |
Retained earnings | 504,500 |
Table (9)
Hence , retained earnings are $506,000 .
Prepare stockholder’s Equity.
K. Company | |
Stockholder’s Equity | |
For the year ended December 31, 2017 | |
Particulars | Amount($) |
Common stock-$25 par value, 50,000 shares authorized, 30,000 shares issued and outstanding | 400,000 |
Paid in capital in excess of par value, common stock | 60,000 |
Retained earnings | 504,500 |
Retained earnings | 964,500 |
Table (10)
Hence , stockholder’s equity is $964,500 .
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Chapter 11 Solutions
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