Financial Accounting for Undergraduates
Financial Accounting for Undergraduates
2nd Edition
ISBN: 9781618530400
Author: FERRIS
Publisher: Cambridge
Question
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Chapter 11, Problem 8AP

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.$400,000
Common stock
Op. Bal.$40,000
Capital in excess of par value-common stock
Op. Bal.$800,000
Capital in excess of par value-preferred stock
Op. Bal.$200,000
Retained earnings
Op. Bal.$550,000

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 1 – Announced a 2 for 1 common stock split, reducing the par value of the common stock to $0.50 per share

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.

Working note:

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

Number of stocksissued and outstanding}=40,0001 stock×2 stocks=80,000 stocks (1)

March 31 – Conversion of common stock into bonds

DateAccount Title and ExplanationPost Ref.DebitCredit
Mar, 31Bonds - par value $80,000 
 Common stock - par value (3)  $5,000
 Paid-in capital in excess of par value –common stock ($80,000$5,000)  $75,000
 (To record conversion of 40 bonds into common stocks)   

Table (1)

  • Bond is a liability account and it decreases the value of liabilities by $80,000. Therefore debit bond account by $80,000.
  • Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 5,000
  • 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 $75,000

Working note:

Calculate the number of bonds converted:

Number of bonds converted=(Total face value of the bondsFace value of one bond)=$80,000$1,000=80 bonds (2)

Calculate the value of common stock:

Common stockpar value}=((Number of common stock per bonds×Par value of common stock)×Number of bonds)=(125×$0.50)×80=$5,000 (3)

June 1 – Acquired equipment with a fair market value of $45,000 in exchange for $300 shares of preferred stock

DateAccount Title and ExplanationPost Ref.DebitCredit
June, 1Equipment $45,000 
 Preferred stock (6)  $30,000
 Paid-in capital in excess of par value –Preferred stock(7)  $15,000
 (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 $45,000. Therefore debit equipment account by $45,000.
  • Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 30,000
  • 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 $15,000

Working note:

Calculation of preferred stock issue value:

Stock issue value=Equipment valueNumber of shares issued=$45,000300 shares=$150 (4)

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

Paid-in capitalin excess of parvalue of per share}=Stock issue valuePar value=$150$100=$50 (5)

Calculate the value of preferred stock:

Preferredsstock=Numberofsharesissued×Issuepriceofeachshare=300 shares×$100=$30,000 (6)

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

Paid-incapitalinexcessofpar-Common=Equipment valuePreferredstock=$45,000$30,000 (7)=$15,000 (7)

September 1 – Acquired 10,000 shares of common stock for cash at $22 per share

DateAccount Title and ExplanationPost Ref.DebitCredit
Sep, 1Treasury stock (8) $200,000 
 Cash  $200,000
 (To record purchase of 10,000 shares of treasury stock at $10 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 $200,000. Therefore, treasury stock account is debited with $200,000.
  • Cash is an asset account, and it decreases the value of cash account by $200,000. Therefore, credit cash account for $200,000.

Working note:

Calculate the value of treasury stock:

Treasury stock = [Number of repurchase shares× Value of per share]=10,000×$20 per share=$200,000 (8)

November 21 – Issued 5,000 shares of common stock at $22 cash per share

DateAccount Title and ExplanationPost Ref.DebitCredit
Nov, 21Cash (13) $110,000 
 Common stock (14)  $2,500
 Paid-in capital in excess of par value-common stock(15)  $107,500
 (To record 5,000, $0.50 par value common stock issued at $22 per stock)   

Table (5)

  • Cash is an asset and it increases the value of assets by $110,000. Therefore debit cash account by $110,000.
  • Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 2,500.
  • 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 $107,500.

Working notes:

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

Cash received=Numberofsharesissued×Issuepricepershare=5,000 shares×$22= $110,000 (9)

Calculate the value of common stock

Commonstock=Numberofsharesissued×Issuepriceofeachshare=5,000 shares×$0.5=$2,500 (10)

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

Paid-incapitalinexcessofpar-Common=Cash receivedCommonstock=$110,000 (9)$2,500(10)=$107,500 (11)

December 28 – Sold 1,000 treasury shares at $23 per share

DateAccount Title and ExplanationPost Ref.DebitCredit
Dec, 28Cash (12) $23,000 
 Treasury stock (13)  $20,000
          Paid-in capital - Treasury stock (14)  $3,000
 (To record 1,000, $20 par value treasury stock issued at $23 per stock)   

Table (6)

  • Cash is an asset account, and it increases the value of cash account by $23,000. Therefore, debit cash account for $23,000.
  • 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= 1,000 shares × $23= $23,000 (12)

Calculate the value of treasury stock resold at original cost

Treasury stock  = Number of resold shares × Original cost per share= 1,000 shares × $20= $20,000 (13)

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

Paid-in capital in lesser of cost} = (Cash received (12)Common stock value (13) )= $23,000 – $20,000= $3,000 (14)

Preferred stock
Op. Bal.$400,000
$30,000
Cl. Bal.$430,000
Common stock
Op. Bal.$40,000
$5,000
$2,500
Cl. Bal.$47,500
Capital in excess of par value-Common stock
Op. Bal.$800,000
$75,000
$107,500
Cl. Bal.$982,,500
Capital in excess of par value
Op. Bal.$200,000
$15,000
Cl. Bal.$215,000

Capital form treasury stock

$3,000
 Cl. Bal.$3,000
Retained earnings
Op. Bal.$550,000
$103,000
Cl. Bal.$653,000
Treasury stock
Repurchase$20,000$200,000
Cl. Bal.$180,000

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Chapter 11 Solutions

Financial Accounting for Undergraduates

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