Chapter 12, Problem 12.4BPR

(1) and (2)

To determine

To journalize: The transactions and post to the eight selected 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.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Record the transactions for Incorporation NE.

Date		Account Titles and Explanation		Debit ($)	Credit ($)
20Y1
January	15	Cash Dividends Payable		34,320
			Cash		34,320
		(To record the payment of cash dividends)
March	15	Cash $\left(48,000\text{ shares}\times \$6.75\right)$		324,000
			Treasury stock $\left(48,000\text{ shares}\times \$6\text{ per share (1) }\right)$		288,000
			Paid-in capital from treasury stock   $\left(\$324,000-\$288,000\right)$		36,000
		(To record sale of treasury stock for above the cost price of $6 per share)
April	13	Cash $\left(200,000\text{ shares}\times \$8\right)$		1,600,000
			Common Stock $\left(200,000\text{ shares}\times \$5\right)$		1,000,000
			Paid-in Capital in Excess of stated value      Common Stock     $\left(\$1,600,000-\$1,000,000\right)$		600,000
		(To record issuance of 200,000 shares in excess of stated value)
June	14	Stock Dividends		184,500
			Common Stock Dividends Distributable		123,000
			Paid-in Capital in excess of Stated     Value-Common stock		61,500
		(To record the declaration of stock dividends)
July	16	Common Stock Dividends Distributable		123,000
			Common Stock		123,000
		(To record the distribution of stock dividends)
October	30	Treasury stock $\left(50,000\text{ shares}\times \$6\text{ per share}\right)$		300,000
			Cash		300,000
		(To record the purchase of 50,000 shares of treasury stock)
December	30	Cash Dividends		63,568
			Cash Dividends Payable		63,568
		(To record the declaration of cash dividends)
December	31	Income summary		775,000
			Retained Earnings		775,000
		(To close the income summary account)
December	31	Retained Earnings		248,068
			Stock dividends		184,500
			Cash Dividends		63,568
		(To record the closing of stock dividends and cash dividends to retained earnings account)

Table (1)

Working note:

Calculate treasury stock cost per share.

$\begin{array}{c}\text{Treasury}\text{stock=}\frac{\left[\begin{array}{l}\text{Total}\text{value}\text{of}\text{treasury}\text{stock}\\ \text{athandasonJanuary}\text{1,}\text{20Y1}\end{array}\right]}{\left[\begin{array}{l}\text{Number}\text{of}\text{treasury}\text{stock}\\ \text{at}\text{hand}\text{as}\text{on}\text{Januray}\text{1,}\text{20Y1}\end{array}\right]}\\ \text{=}\frac{\text{\$288,000}}{\text{48,000}\text{shares}}\\ \text{=\$6 per}\text{share}\end{array}$ (1)

Compute number of shares outstanding after the issuance of common stock on April 13.

$\begin{array}{c}\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\\ \text{after}\text{the}\text{sale}\text{of}\text{treasury}\text{stock}\text{on}\text{June}\text{6}\end{array})\text{=}\left[\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\text{as}\\ \text{of}\text{January}\text{1,20Y1+Number}\text{of}\text{treasury}\\ \text{shares}\text{issued}\text{on}\text{April}\text{13}\end{array}\right]\\ \text{=620,000shares+75,000shares}\\ \text{=450,000shares}\end{array}$ (2)

Compute the stock dividends shares.

$\begin{array}{c}\text{Stock}\text{dividends}\text{shares=}\left(\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\text{after}\\ \text{the}\text{sale}\text{of}\text{treasury}\text{stock}\text{on}\text{June}\text{6×}\\ \text{Stock}\text{dividend}\text{percentage}\end{array}\right)\\ \text{=820,000shares(2)×3\%}\\ \text{=24,600shares}\end{array}$ (3)

Compute the stock dividends amount payable to common stockholders.

$\begin{array}{c}\text{Stock}\text{dividends=Stock}\text{dividend}\text{shares×Market}\text{value}\text{per}\text{share}\\ \text{=24,600shares(3)×\$7}\text{.50}\\ \text{=\$184,500}\end{array}$ (4)

Compute common stock dividends distributable value.

$\begin{array}{c}\begin{array}{l}\text{Common}\text{stock}\text{dividend}\\ \text{distributable}\text{value}\end{array})\text{=Stock}\text{dividend}\text{shares×Par}\text{value}\text{of}\text{stock}\\ \text{=24,600shares(3)×\$5}\\ \text{=\$123,000}\end{array}$ (5)

Compute paid-in capital in excess of par value-common stock.

$\begin{array}{c}\text{Paid}\text{in}\text{capital=Stock}\text{dividends-Common}\text{stock}\text{dividend}\text{distributable}\text{value}\\ \text{=\$184,500(4)-\$123,000(5)}\\ \text{=61,500}\end{array}$ (6)

Compute number of shares outstanding as on December 30.

$\begin{array}{c}\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\\ \text{as}\text{on}\text{December}\text{28}\end{array})\text{=}\left[\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\text{after}\text{the}\text{sale}\text{of}\text{treasury}\\ \text{stock}\text{on}\text{April}\text{13+Issuance}\text{of}\text{stock}\text{dividends}\text{on}\text{June}\text{14-}\\ \text{Purchase}\text{of}\text{treasury}\text{stock}\text{on}\text{October}\text{30}\end{array}\right]\\ \text{=}\left[\begin{array}{l}\text{820,000shares(2)+24,600shares(3)}\\ \text{-50,000shares}\end{array}\right]\\ \text{=794,600shares}\end{array}$ (7)

Calculate the amount of cash dividend declared on December 28.

$\begin{array}{c}\text{Cash}\text{dividend}\text{declared}\text{on}\text{December}\text{28=}\left[\begin{array}{l}\text{Number}\text{of}\text{shares}\text{outstanding}\text{as}\\ \text{on}\text{December}\text{28×\$0}\text{.10per}\text{share}\end{array}\right]\\ \text{=794,600shares(7)×\$0}\text{.08shares}\\ \text{=\$63,568}\end{array}$ (8)

Enter the beginning balance and post the transactions into the stockholders’ equity accounts for Incorporation NE.

Common stock account is a component of stockholder’s equity with a normal credit balance.

Common stock
Date	Particulars	Debit	Date	Particulars	Credit
			January 1	Balance	$3,100,000
			April 13	Cash	$1,000,000
			July 16	Stock dividends distributable	$123,000
	Total	$ 0		Total	4,223,000
			December 31	Balance	$4,223,000

Table (2)

Paid-in capital in excess of stated value - Common stock account is a component of stockholder’s equity with a normal credit balance.

Paid-in capital in excess of stated value - Common stock
Date	Particulars	Debit	Date	Particulars	Credit
			January 1	Balance	$1,240,000
			April 13	Cash	$600,000
			June 14	Stock dividends	$61,500
	Total	$ 0		Total	$ 1,901,500
			December 31	Balance	$ 1,901,500

Table (3)

Retained earnings are a component of stockholder’s equity with a normal credit balance.

Retained earnings
Date	Particulars	Debit	Date	Particulars	Credit
December 31	Cash and stock dividends	$248,068	January 1	Balance	$4,875,000
			December 31	Income summary	$775,000
	Total	$248,068		Total	$5,650,000
			December 31	Balance	$5,401,932

Table (4)

Treasury stock is a component of stockholder’s equity with a normal debit balance.

Treasury stock
Date	Particulars	Debit	Date	Particulars	Credit
January 1	Balance	$288,000	March 15	Cash	$288,000
October 30	Cash	$300,000
	Total	$ 588,000		Total	$288,000
December 31	Balance	$ 300,000

Table (5)

Paid-in capital from treasury stock is a component of stockholder’s equity with a normal credit balance.

Paid-in capital from treasury stock
Date	Particulars	Debit	Date	Particulars	Credit
			March 15	Cash	$36,000
	Total	$ 0		Total	$36,000
			December 31	Balance	$36,000

Table (6)

Stock dividend distributable is a contra stockholder’s equity with a normal credit balance.

Stock dividend distributable
Date	Particulars	Debit	Date	Particulars	Credit
July 16	Common stock	$123,000	June 14	Stock dividend	$123,000
	Total	$123,000		Total	$123,000
			December 31	Balance	$0

Table (7)

Stock dividend is a component of stockholder’s equity with a normal debit balance.

Stock dividend
Date	Particulars	Debit	Date	Particulars	Credit
June 14	Stock dividend distributable	$123,000	December 31	Retained earnings	$184,500
July 5	Paid in capital in excess of stated value –Common value	$61,500
	Total	$184,500		Total	$184,500
			December 31	Balance	$0

Table (8)

Cash dividend is a component of stockholder’s equity with a normal debit balance.

Stock dividend
Date	Particulars	Debit	Date	Particulars	Credit
December 30	Cash dividend payable	$63,568	December 31	Retained earnings	$63,568
	Total	$63,568		Total	$63,568
			December 31	Balance	$0

Table (9)

(3)

To determine

To prepare: Statement of stockholders’ equity the year ended December 31, 20Y1.

Explanation of Solution

Statement of stockholders’ equity: The statement which reports the changes in stock, paid-in capital, retained earnings, and treasury stock, during the year is referred to as statement of stockholders’ equity.

Prepare a statement of stockholders’ equity for the year ended December 31, 20Y1.

Incorporation NE
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y1
	Common Stock	Additional Paid-in Capital	Retained Earnings	Treasury Stock	Total
Balances, January 1, 20Y1	$3,100,000	$1,240,000	$4,875,000	(288,000)	$8,927,000
Net income			775,000		775,000
Dividends on stock	123,000	61,500	(184,500)		0
Cash dividends			(63,568)		(63,568)
Paid-in capital from treasury stock		36,000		288,000	324,000
Sale of treasury stock				(300,000)	(300,000)
Issuance of additional stock	1,000,000	600,000			1,600,000
Balances, December 31, 20Y1	$4,223,000	$1,937,500	$5,401,932	$(300,000)	$11,262,432

Table (10)

(4)

To determine

To prepare: The stockholders’ equity section of the December 31, 20Y1, balance sheet.

Explanation of Solution

Stockholders’ equity: It refers to the amount of capital that includes the amount of investment by the stockholders, earnings generated from the normal business operations, and less any dividends paid to the stockholders.

Prepare the stockholders’ equity section of the December 31, 20Y1, balance sheet.

Incorporation NE
Partial Balance Sheet
December 31, 20Y1
Stockholders' Equity	Amount	Amount	Amount
Paid-in capital:
Common stock, $5 stated (900,000 shares authorized; 620,000 shares issued, 794,600 shares outstanding)	$4,223,000
Excess over stated value	$1,901,500
Paid-in capital, common stock		$6,124,500
From sale of treasury stock		$36,000
Total paid-in capital			$6,160,000
Retained earnings			$5,401,932
Total			$11,562,432
Treasury common stock (50,000 shares at cost)			$(300,000)
Total stockholders' equity			$11,262,432

Table (11)