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.

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.	$500,000

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.	$800,000

b.

To determine

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

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

$\begin{array}{c}\begin{array}{l}\text{Number of stocks}\\ \text{issued and outstanding}\end{array}\}=\frac{\text{40,000}}{\text{1 stock}}\times 2\text{ stocks}\\ =80,000\text{ stocks}\end{array}$ (1)

March 31 – Conversion of common stock into bonds

Date	Account Title and Explanation	Post Ref.	Debit	Credit
Mar, 31	Bonds - par value		$75,000
	Common stock - par value (3)			$4,125
	Paid-in capital in excess of par value –common stock $\left(\$75,000-\$4,125\right)$			$70,875
	(To record conversion of 75 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 $75,000.
• Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 4,125
• 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 $70,875

Working note:

Calculate the number of bonds converted:

$\begin{array}{c}\text{Number of bonds converted}=\left(\frac{\text{Total face value of the bonds}}{\text{Face value of one bond}}\right)\\ =\frac{\text{\$75,000}}{\text{\$1,000}}\\ =75\text{ bonds}\end{array}$ (2)

Calculate the value of common stock:

$\begin{array}{c}\begin{array}{l}\text{Common stock}\\ \text{par value}\end{array}\}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Number of common stock per bonds}\\ \times \text{Par value of common stock}\end{array}\right)\\ \times \text{Number of bonds}\end{array}\right)\\ =\left(\text{110}\times \text{\$0}\text{.50}\right)\times 75\\ =\$4,125\end{array}$ (3)

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

Date	Account Title and Explanation	Post Ref.	Debit	Credit
June, 1	Equipment		$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:

$\begin{array}{c}\text{Stock issue value}=\frac{\text{Equipment value}}{\text{Number of shares issued}}\\ =\frac{\text{\$45,000}}{\text{300 shares}}\\ =\$150\end{array}$ (4)

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

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital}\\ \text{in excess of par}\\ \text{value of per share}\end{array}\}=\text{Stock issue value}-\text{Par value}\\ =\text{\$150}-\text{\$100}\\ =\text{\$50}\end{array}$ (5)

Calculate the value of preferred stock:

$\begin{array}{c}\text{Preferreds}\text{stock}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{of}\text{each}\text{share}\\ \text{=}3\text{00 shares}\text{×}\text{\$100}\\ \text{=}\text{\$30,000}\end{array}$ (6)

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

$\begin{array}{c}\text{Paid-in}\text{capital}\text{in}\text{excess}\text{of}\text{par-Common}\text{=Equipment value}-\text{Preferred}\text{stock}\\ \text{=}\$45\text{,000}-\text{\$30,000 (7)}\\ \text{=}\text{\$15,000}\end{array}$ (7)

September 1 – Acquired 15,000 shares of common stock for cash at $20 per share

Date	Account Title and Explanation	Post Ref.	Debit	Credit
Sep, 1	Treasury stock (8)		$300,000
	Cash			$300,000
	(To record purchase of 15,000 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 $300,000. Therefore, treasury stock account is debited with $300,000.
• Cash is an asset account, and it decreases the value of cash account by $300,000. Therefore, credit cash account for $300,000.

Working note:

Calculate the value of treasury stock:

$\begin{array}{c}\text{Treasury stock = }\left[\begin{array}{l}\text{Number of repurchase shares}\times \\ \text{ Value of per share}\end{array}\right]\\ \text{=15,000}\times \$20\text{ per share}\\ \text{=\$300,000}\end{array}$ (8)

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

Date	Account Title and Explanation	Post Ref.	Debit	Credit
Nov, 21	Cash (13)		$110,000
	Common stock (14)			$5,000
	Paid-in capital in excess of par value-common stock(15)			$105,000
	(To record 5,000, $1 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 $ 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 $105,000.

Working notes:

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

$\begin{array}{c}\text{Cash received}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{per}\text{share}\\ \text{=}5\text{,000 shares}\text{×}\text{\$22}\\ \text{= \$110,000}\end{array}$ (9)

Calculate the value of common stock

$\begin{array}{c}\text{Common}\text{stock}\text{=}\text{Number}\text{of}\text{shares}\text{issued}\text{×}\text{Issue}\text{price}\text{of}\text{each}\text{share}\\ \text{=}5,0\text{00 shares}\text{×}\text{\$1}\\ \text{=}\text{\$5,000}\end{array}$ (10)

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

$\begin{array}{c}\text{Paid-in}\text{capital}\text{in}\text{excess}\text{of}\text{par-Common}\text{=}\text{Cash received}-\text{Common}\text{stock}\\ \text{=}\text{\$110,000 (9)}-\text{\$5,000(10)}\\ \text{=}\$105\text{,000}\end{array}$ (11)

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

Date	Account Title and Explanation	Post Ref.	Debit	Credit
Dec, 28	Cash (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.

$\begin{array}{c}\text{Cash received = Number of resold shares }\times \text{ Selling price per share}\\ \text{= 1,000 shares × \$23}\\ \text{= \$23,000}\end{array}$ (12)

Calculate the value of treasury stock resold at original cost

$\begin{array}{c}\text{Treasury stock = Number of resold shares }\times \text{ Original cost per share}\\ \text{= 1,000 shares × \$20}\\ \text{= \$20,000}\end{array}$ (13)

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

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{lesser of cost}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received }\left(12\right)\text{–}\\ \text{Common stock value }\left(13\right)\end{array}\right)\\ \text{= \$23,0}00\text{ – \$20,000}\\ \text{= \$3,000}\end{array}$ (14)

Preferred stock
		Op. Bal.	$500,000
			$30,000
		Cl. Bal.	$530,000

Common stock
		Op. Bal.	$40,000
			$4,125
			$5,000
		Cl. Bal.	$49,125

Capital in excess of par value-Common stock
		Op. Bal.	$800,000
			$70,875
			$105,000
		Cl. Bal.	$975,875

Capital in excess of par value- Preferred stock
		Op. Bal.	$200,000
			$15,000
		Cl. Bal.	$215,000
Capital form treasury stock
			$3,000
		Cl. Bal.	$3,000

Retained earnings
		Op. Bal.	$625,000
			$103,000
		Cl. Bal.	$728,000

Treasury stock
Repurchase	$20,000		$200,000
Cl. Bal.	$180,000