FINANCIAL ACCT.F/UNDERGRADS-W/ACCESS
FINANCIAL ACCT.F/UNDERGRADS-W/ACCESS
1st Edition
ISBN: 9781618531612
Author: Wallace, Nelson, Christensen, Ferris
Publisher: Cambridge
Question
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Chapter 11, Problem 4BP

a.

To determine

Set up T-accounts for the stockholder’s equity accounts as of the beginning of the year, and enter the January 1 balances.

a.

Expert Solution
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Explanation of Solution

T-account:

The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit, and the right hand side is known as credit.

Set up T-accounts for the stockholder’s equity accounts as of the beginning of the year, and enter the January 1 balances as follows:

Preferred stock
Op. Bal.$280,000
Common stock
Op. Bal.$500,000
Capital in excess of par value-common stock
Op. Bal.$385,000
Capital in excess of par value-preferred stock
Op. Bal.$70,000

Retained earnings

Op. Bal.$238,000

b.

To determine

Prepare the journal entries for the given transactions, and post the transactions to T-accounts.

b.

Expert Solution
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Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

Prepare the journal entries for the given transactions, and post the transactions to T-accounts as follows:

January 15 - Issued 2,000 shares of preferred stock for $62 cash per share

DateAccount Title and ExplanationPost Ref.DebitCredit
January 15Cash (1) $124,000 
 Preferred stock (2)  $80,000
 Paid-in capital in excess of par value-preferred stock (3)  $44,000
 (To record 2,000, $40 par value preferred stock issued at $62 per stock)   

Table (1)

  • Cash is an asset and it increases the value of assets by $124,000. Therefore debit cash account by $124,000.
  • Preferred stock is a component of stockholders’ equity and it is increased. Therefore credit preferred stock account by $ 80,000.
  • Paid-in capital in excess of par-common is a component of stockholders’ equity and it is increased. Therefore credit paid-in capital in excess of par-common account by $44,000.

Working notes:

Calculate the cash received through issuance of shares (par preferred stock)

Cash received=Numberofsharesissued×Issuepricepershare=2,000shares×$62= $124,000 (1)

Calculate the value of common stock

Commonstock=Numberofsharesissued×Issuepriceofeachshare=2,000 shares×$40=$80,000 (2)

Calculate the value of paid-in capital in excess of par-common

Paid-incapitalinexcessofpar-Common=Cash receivedCommonstock=$124,000 (1)$80,000 (2)=$44,000 (3)

January 20 – Issued 4,000 shares of common stock at $36 cash per share

DateAccount Title and ExplanationPost Ref.DebitCredit
January 20Cash (4) $144,000 
 Common stock (5)  $80,000
 Paid-in capital in excess of par value-common stock (6)  $66,000
 (To record 4,000, $20 par value common stock issued at $36 per stock)   

Table (2)

  • Cash is an asset and it increases the value of assets by $144,000. Therefore debit cash account by $144,000.
  • Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 80,000.
  • Paid-in capital in excess of par-common is a component of stockholders’ equity and it is increased. Therefore credit paid-in capital in excess of par-common account by $66,000.

Working notes:

Calculate the cash received through issuance of shares (par common stock)

Cash received=Numberofsharesissued×Issuepricepershare=4,000 shares×$36= $144,000 (4)

Calculate the value of common stock

Commonstock=Numberofsharesissued×Issuepriceofeachshare=4,000 shares×$20=$80,000 (5)

Calculate the value of paid-in capital in excess of par-common

Paid-incapitalinexcessofpar-Common=Cash receivedCommonstock=$144,000 (4)$80,000(5)=$66,000 (6)

January 31 – Conversion of common stock into bonds

DateAccount Title and ExplanationPost Ref.DebitCredit
January 31Bonds - par value (8) $20,000 
 Common stock - par value (9)  $10,000
 Paid-in capital in excess of par value-common stock ($20,000$10,000)  $10,000
 (To record conversion of 20 bonds into common stocks)   

Table (1)

  • Bond is a liability account and it decreases the value of liabilities by $20,000. Therefore debit bond account by $20,000.
  • Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 10,000
  • Paid-in capital in excess of par-common is a component of stockholders’ equity and it is increased. Therefore credit paid-in capital in excess of par-common account by $10,000

Working note:

Calculate the number of bonds converted:

Number of bonds converted=(Total face value of the bondsFace value of one bond)=$20,000$1,000=20 Bonds (7)

Calculate the par value of bond

Value of bond = Number of stock (7)×Conveting value per share =(20 stocks×$1,000)=$20,000 (8)

Calculate the value of common stock:

Common stock par value=(((Number of common stock per bonds)×Par value of common stock)Number of bonds)=(25×$20)×20=$10,000 (9)

May 18– Company S announced the common stock split

Stock split increases the number of shares and reduces the par value per share. Hence, the common stock account balance should not change for this stock split. The balance of common stock account is $580,000(58,000 Stock (10) ×$10).

Working note:

Calculate the value of number of stocks issued and outstanding after the stock split

Number of stocksissued and outstanding}=25,000+4,0001 stock×2 stocks=58,000 stocks (10)

June 1 – Acquired equipment with a fair market value of $60,000 in exchange for $500 shares of preferred stock

DateAccount Title and ExplanationPost Ref.DebitCredit
June, 1Equipment $40,000 
 Preferred stock (13)  $20,000
 Paid-in capital in excess of par value-preferred stock (14)  $20,000
 (To record 500, $100 par value common stock issued at $125 per stock)   

Table (2)

  • Equipment is an asset and it increases the value of assets by $40,000. Therefore debit equipment account by $40,000.
  • Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 20,000
  • Paid-in capital in excess of par-common is a component of stockholders’ equity and it is increased. Therefore credit paid-in capital in excess of par-common account by $20,000

Working note:

Calculation of preferred stock issue value:

Preferred stockissue value}=Equipment valueNumber of shares issued=$40,0002,000 shares=$120 (11)

Calculation of paid-in capital in excess of par value per share:

Paid-in capitalin excess of parvalue of per share}=(Preferred stock issue valuePreferred stock par value)=$20$10=$10 (12)

Calculate the value of preferred stock:

Preferredsstock=Numberofsharesissued×Issuepriceofeachshare=2,000 shares×$10=$20,000 (13)

Calculate the value of paid-in capital in excess of preferred stock

Paid-incapitalinexcessofpar-Common=Equipment valuePreferredstock=$40,000$20,000 (13)=$20,000 (14)

September 1 – Purchased 3,500 share of common stock as treasury stock at $18 cash per share.

DateAccount Title and ExplanationPost Ref.DebitCredit
September, 1Treasury stock (15) $63,000 
 Cash  $63,000
 (To record purchase of 3,500 shares of treasury stock at $18 per share)   

Table (3)

  • Treasury stock is contra-stockholders’ equity account with a normal balance of debit. Thus, when treasury stocks are purchased, it decreases the stockholders’ equity account. In this case, it reduces the stockholders’ equity by $63,000. Therefore, treasury stock account is debited with $63,000.
  • Cash is an asset account, and it decreases the value of cash account by $63,000. Therefore, credit cash account for $63,000.

Working note:

Calculate the value of treasury stock:

Treasury stock = [Number of repurchase shares× Value of per share]=3,500×$18 per share=$63,000 (15)

October 12 – Sales of treasury stock

DateAccount Title and ExplanationPost Ref.DebitCredit
Oct, 12Cash (16) $18,900 
 Treasury stock (17)  $16,200
 Paid-in capital excess of par value- Treasury stock (18)  $2,700
 (To record 900, $18 par value treasury stock issued at $21 per stock)   

Table (4)

  • Cash is an asset account, and it increases the value of cash account by $18,900. Therefore, debit cash account for $18,900.
  • Treasury stock is contra-stockholders’ equity account with a normal balance of debit. 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.

Working note:

Calculate the value of cash received from the resold of treasury stock.

Cash received = Number of resold shares × Selling price per share= 900 shares × $21= $18,900 (16)

Calculate the value of treasury stock resold at original cost

Treasury stock  = Number of resold shares × Original cost per share= 900 shares × $18= $16,200 (17)

Calculate the value of paid-in capital in excess of cost, TS.

Paid-in capital in excess of cost} = (Cash received (16)Common stock value (17) )= $18,900 – $16,200= $2,700 (18)

December 22 – Issued 500 shares of preferred stock for $59 cash per share

DateAccount Title and ExplanationPost Ref.DebitCredit
December 22Cash (19) $29,500 
 Preferred stock (20)  $25,000
 Paid-in capital in excess of par value-preferred stock (21)  $4,500
 (To record 1,000, $50 par value preferred stock issued at $50 per stock)   

Table (1)

  • Cash is an asset and it increases the value of assets by $29,500. Therefore debit cash account by $29,500.
  • Preferred stock is a component of stockholders’ equity and it is increased. Therefore credit preferred stock account by $ 25,000.
  • Paid-in capital in excess of par-common is a component of stockholders’ equity and it is increased. Therefore credit paid-in capital in excess of par-common account by $4,500.

Working notes:

Calculate the cash received through issuance of shares (par preferred stock)

Cash received=Numberofsharesissued×Issuepricepershare=500shares×$59= $29,500 (19)

Calculate the value of common stock

Commonstock=Numberofsharesissued×Issuepriceofeachshare=500 shares×$50=$25,000 (20)

Calculate the value of paid-in capital in excess of par-common

Paid-incapitalinexcessofpar-Common=Cash receivedCommonstock=$29,500 (19)$25,000 (20)=$4,500 (21)

December 28 – Sold 1,100 of the remaining treasury shares at $16 per share

DateAccount Title and ExplanationPost Ref.DebitCredit
December 28Cash (22) $17,600 
 Paid-in capital - Treasury stock (24) $2,200 
 Treasury stock (23)  $19,800
 (To record 1,100, $18 par value treasury stock issued at $16 per stock)   

Table (4)

  • Cash is an asset account, and it increases the value of cash account by $17,600. Therefore, debit cash account for $17,600.
  • Treasury stock is contra-stockholders’ equity account with a normal balance of debit. 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 less 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 debited for excess selling price.

Working note:

Calculate the value of cash received from the resold of treasury stock.

Cash received = Number of resold shares × Selling price per share= 1,100 shares × $16= $17,600 (22)

Calculate the value of treasury stock resold at original cost

Treasury stock  = Number of resold shares × Original cost per share= 1,100 shares × $18= $19,800 (23)

Calculate the value of paid-in capital in lesser than the cost, TS.

Paid-in capital in excess of cost} = (Cash received (22)Teasury stock value (23) )= $17,600 – $19,800= $2,200 (24)

Preferred stock
Op. Bal.$350,000

$80,000

$25,000

Cl. Bal.$455,000
Common stock
Op. Bal.$500,000
$80,000
$10,000
Cl. Bal.$590,000
Capital in excess of par value-common stock
Op. Bal.$385,000
$66,000
$10,000
Cl. Bal.$461,000
Capital in excess of par value-preferred stock
Op. Bal.$70,000
$44,000
$20,000
$4,500
Cl. Bal.$138,500
Capital form treasury stock
July 17$2,200May 12$2,700
 Cl. Bal.$500
Retained earnings
Op. Bal.$238,000
$85,000
Cl. Bal.$323,000
Treasury stock
Repurchase$16,200$63,000
$19,800
Cl. Bal.$27,000

c.

To determine

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

c.

Expert Solution
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Explanation of Solution

Company S

Equity section on December 31

ParticularsAmountAmount
Paid-in capital:  
Common stock, $10 per value, authorized shrares is 100,000 and issued 78,000 stocks$590,000 
8% Preferred stock, $50 per value, authorized shrares is 10,000 and issued 60,000 stocks$455,000 
2,000 shares in treasury reissued$36,500 
Capital from treasury stock$500 
Paid-in capital in excess of par value – common stock$461,000 
Paid-in capital in excess of par value – Preferred stock$138,500 
     Total paid-in capital $1,681,500
Retained earnings $323,000
Less: Treasury stock $27,000
Total stockholders’ equity $1,977,500

Table (7)

Therefore, the ending balance of stockholder’s equity is $1,977,500.

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Chapter 11 Solutions

FINANCIAL ACCT.F/UNDERGRADS-W/ACCESS

Ch. 11 - Prob. 1QCh. 11 - Prob. 2QCh. 11 - Prob. 3QCh. 11 - Prob. 4QCh. 11 - Prob. 5QCh. 11 - Prob. 6QCh. 11 - Prob. 7QCh. 11 - Prob. 8QCh. 11 - Prob. 9QCh. 11 - Prob. 10QCh. 11 - Prob. 11QCh. 11 - Prob. 12QCh. 11 - Prob. 13QCh. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - Prob. 16QCh. 11 - Prob. 17QCh. 11 - Prob. 18QCh. 11 - Prob. 19QCh. 11 - Prob. 20QCh. 11 - Prob. 1SECh. 11 - Prob. 2SECh. 11 - Prob. 3SECh. 11 - Prob. 4SECh. 11 - Prob. 5SECh. 11 - Prob. 6SECh. 11 - Prob. 7SECh. 11 - Prob. 8SECh. 11 - Prob. 9SECh. 11 - Prob. 10SECh. 11 - Prob. 11SECh. 11 - Prob. 1AECh. 11 - Prob. 2AECh. 11 - Prob. 3AECh. 11 - Prob. 4AECh. 11 - Prob. 5AECh. 11 - Prob. 6AECh. 11 - Prob. 7AECh. 11 - Prob. 8AECh. 11 - Prob. 9AECh. 11 - Prob. 10AECh. 11 - Prob. 11AECh. 11 - Prob. 12AECh. 11 - Prob. 13AECh. 11 - Prob. 14AECh. 11 - Prob. 15AECh. 11 - Prob. 1BECh. 11 - Prob. 2BECh. 11 - Prob. 3BECh. 11 - Prob. 4BECh. 11 - Prob. 5BECh. 11 - Prob. 6BECh. 11 - Prob. 7BECh. 11 - Prob. 8BECh. 11 - Prob. 9BECh. 11 - Prob. 10BECh. 11 - Prob. 11BECh. 11 - Prob. 12BECh. 11 - Prob. 13BECh. 11 - Prob. 14BECh. 11 - Prob. 15BECh. 11 - Prob. 1APCh. 11 - Prob. 2APCh. 11 - Prob. 3APCh. 11 - Prob. 4APCh. 11 - Prob. 5APCh. 11 - Prob. 6APCh. 11 - Prob. 7APCh. 11 - Prob. 8APCh. 11 - Prob. 9APCh. 11 - Prob. 10APCh. 11 - Prob. 11APCh. 11 - Prob. 1BPCh. 11 - Prob. 2BPCh. 11 - Prob. 3BPCh. 11 - Prob. 4BPCh. 11 - Prob. 5BPCh. 11 - Prob. 6BPCh. 11 - Prob. 7BPCh. 11 - Prob. 8BPCh. 11 - Prob. 9BPCh. 11 - Prob. 10BPCh. 11 - Prob. 11BPCh. 11 - Prob. 11SPCh. 11 - Prob. 1EYKCh. 11 - Prob. 2EYKCh. 11 - Prob. 3EYKCh. 11 - Prob. 4EYKCh. 11 - Prob. 5EYKCh. 11 - Prob. 6EYKCh. 11 - Prob. 7EYKCh. 11 - Prob. 10EYKCh. 11 - Prob. 11EYK
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