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

a.

To determine

Prepare the journal entries for the given transactions.

a.

Expert Solution
Check Mark

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 as follows:

January 8 – Issued 10,000 shares of common stock at $23 cash per share

DateAccount Title and ExplanationPost Ref.DebitCredit
January 8Cash (1) $230,000 
 Common stock (2)  $100,000
 Paid-in capital in excess of par value-common stock(3)  $130,000
 (To record 10,000, $23 par value common stock issued at $10 per stock)   

Table (1)

  • Cash is an asset and it increases the value of assets by $230,000. Therefore debit cash account by $230,000.
  • Common stock is a component of stockholders’ equity and it is increased. Therefore credit common stock account by $ 100,000.
  • 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 $130,000.

Working notes:

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

Cash received=Numberofsharesissued×Issuepricepershare=10,000 shares×$23= $230,000 (1)

Calculate the value of common stock

Commonstock=Numberofsharesissued×Issuepriceofeachshare=10,000 shares×$10=$100,000 (2)

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

Paid-incapitalinexcessofpar-Common=Cash receivedCommonstock=$230,000 (1)$100,000(2)=$130,000 (3)

March 12 – Sales of treasury stock

DateAccount Title and ExplanationPost Ref.DebitCredit
March, 12Cash (4) $104,000 
 Treasury stock (5)  $20,000
 Paid-in capital excess of par value- Treasury stock (6)  $84,000
 (To record 4,000, $21 par value treasury stock issued at $26 per stock)   

Table (2)

  • Cash is an asset account, and it increases the value of cash account by $104,000. Therefore, debit cash account for $104,000.
  • 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= 4,000 shares × $26= $104,000 (4)

Calculate the value of treasury stock resold at original cost

Treasury stock  = Number of resold shares × Original cost per share= 4,000 shares × $21= $84,000 (5)

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

Paid-in capital in excess of cost} = (Cash received (4)Common stock value (5) )= $104,000 – $20,000= $20,000 (6)

June 30 – Declared six percent stock dividends. Market value of the common stock was $30 per share.

DateAccount Title and ExplanationPost Ref.DebitCredit
June, 30Stock dividends (7) $88,200 
 Stock dividend distributable (8)  $29,400
 Paid-in capital excess of par value ($88,200$29,400)  $58,800
 (To record declaration of 6% stock dividend on common stock)   

Table (3)

  • Stock Dividends is a contra stockholders’ equity account with a normal debit balance. Increase in stock dividend decreases the stockholders’ equity account. Therefore, debit Stock Dividends account with $88,200.
  • Stock Dividends Distributable is a component of stockholders’ equity account, and it increases the value of stock dividends. Therefore, credit Stock Dividends Distributable account with $29,400.
  • Paid-in Capital in Excess of Par Value - Common stock is a component of stockholders’ equity account, and the amount is increased due to the increase in capital excess of common stock value. Therefore, credit Paid-in Capital in Excess of Par Value account with $58,800.

Working note:

Calculate the value of stock dividends

Stock dividend=(Number of common stocks×Percentage of common stock dividend×Market price per share)=(49,000 stocks×6%×$30)=2,940 stocks×$30=$88,200 (7)

Calculate the value of stock dividend distributable

Stock dividenddistributable}=(Number of common stocks×Percentage of common stock dividend×Par value)=(49,000 stocks×6%×$10)=2,940 stocks×$10=$29,400 (8)

July 10 – Issued the stock dividend declared on June 30

DateAccount Title and ExplanationPost Ref.DebitCredit
July 10Stock dividend distributable (8) $29,400
 Common stock  $29,400
 (To record the issuance of stock dividend on common stocks)   

Table (4)

  • Stock Dividends Distributable is a stockholders’ equity account and the amount is decreased due to the transfer of Common Stock Dividends Distributable amount to Common Stock account. Therefore, debit Common Stock Dividends Distributable account with $29,400.
  • Common Stock is a stockholders’ equity account and the amount is increased due to the amount of the common shares transferred in the name of stock dividend. Therefore, credit Common Stock account with $29,400.

Closing entry for dividends account:

DateAccount Title and ExplanationPost Ref.DebitCredit
 Retained earnings $29,400
 Stock dividends  $29,400
 (To close stock dividends account)   

Table (5)

The dividends account is closed by transferring the amount of dividends to retained earnings in order to bring the dividends account balance to zero. Hence, debit the retained earnings for $29,400 and credit dividends account for $29,400.

October 7– Purchased 1,500 share of common stock as treasury stock at $27 cash per share.

DateAccount Title and ExplanationPost Ref.DebitCredit
October 7Treasury stock (9) $40,500 
 Cash  $40,500
 (To record purchase of 1,500 shares of treasury stock at $27 per share)   

Table (6)

  • 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 $40,500. Therefore, treasury stock account is debited with $40,500.
  • Cash is an asset account, and it decreases the value of cash account by $40,500. Therefore, credit cash account for $40,500.

Working note:

Calculate the value of treasury stock:

Treasury stock = [Number of repurchase shares× Value of per share]=1,500×$27 per share=$40,500 (9)

December 18 – Declared cash dividend of $90 cent per share

DateAccount Title and ExplanationPost Ref.DebitCredit
December 18Cash dividends $36,396 
 Dividends payable – common stock (11)  $36,396
 (To record the declaration of $0.90 dividend on common stock)   

Table (7)

  • Dividends are a component of stockholder’s and it decreases the value of retained earnings by $36,396. Hence, debit the dividends account for $36,396.
  • Dividends payable –common stock is a liability account and it decreases the value of liability by $36,396. Hence, credit the dividends payable-common stock for $36,396.

Working note:

Calculate the number of stock outstanding

Number of commonstock outstanding}=((Beginning outstanding stock+Treasury stock issued+Stock dividend)Treasury stock purchase)=(35,000+4,000+2,940)1,500=40,440 (10)

Calculate the common stock dividends during the current year

Common stock dividends = (Number of shares (10)×Declared dividends per share×)=40,440shares×$0.90 per share=$36,396 (11)

January 9– Paid the cash dividend declared on December 18

DateAccount Title and ExplanationPost Ref.DebitCredit
January 9Dividends payable – common stock $36,396
 Cash  $36,396
 (To record the payment of dividend)   

Table (8)

  • Dividends payable- common stock is a liability account and it decreases the value of liability by $36,396. Hence, debit the dividends payable-common stock for $36,396.
  • Cash is an assets account and it decreases the value of asset by $36,396. Hence, credit the cash account for $36,396.

b.

To determine

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

b.

Expert Solution
Check Mark

Explanation of Solution

Company D

Equity section on December 31

ParticularsAmountAmount
Paid-in capital:  
Common stock, $10 per value, authorized shrares is 200,000 and issued 45,000 stocks (12)$479,400 
Capital from treasury stock (14)$38,000 
Paid-in capital in excess of par value-common stock (13)$503,800 
Total paid-in capital $1,021,200
Retained earnings (15) $447,604
Less: Treasury stock (16) $40,500
Total stockholders’ equity $1,428,304

Table (9)

Therefore, the ending balance of stockholder’s equity is $1,428,304.

Working note:

T-accounts

Common stock
Op. Bal.$350,000
$100,000
Stock dividend$29,400
Cl. Bal.$479,400

(12)

Capital in excess of par value-common stock
Op. Bal.$315,000
$130,000
$58,800
Cl. Bal.$503,800

(13)

Capital form treasury stock
Op. Bal$18,000
Sales$20,000
 Cl. Bal.$38,000

(14)

Retained earnings
Cash dividend$36,396Op. Bal.$298,000
$186,000
Cl. Bal.$447,604

(15)

Treasury stock
Op. Bal.$84,000Sales$84,000
Repurchase$40,500
Cl. Bal.$40,500

(16)

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Chapter 11 Solutions

Financial Accounting for Undergraduates

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