Financial And Managerial Accounting
Financial And Managerial Accounting
15th Edition
ISBN: 9781337902663
Author: WARREN, Carl S.
Publisher: Cengage Learning,
Question
Chapter 12, Problem 5PA
To determine

Journalize the transactions.

Expert Solution & Answer
Check Mark

Answer to Problem 5PA

Journalize the transactions for Corporation P.

DateAccount Titles and ExplanationDebit ($)Credit ($)
January 9No entry is required  
 
February 28Treasury stock (40,000 shares×$28 per share)1,120,000 
        Cash 1,120,000
  (To record the purchase of 40,000 shares of treasury stock)  
 
May 1Cash Dividends                                        (2)                                                        199,200 
       Cash Dividends Payable 199,200
  (To record the declaration of cash dividends)  
 
July 10Cash Dividends Payable                          (2)                                                        199,200 
       Cash  199,200
  (To record the payment of cash dividends)  
 
September7Cash (30,000 shares × $34 per share)1,020,000 
  

     Treasury stock          

     (80,000 shares × $28 per share)

 840,000
  

     Paid-in capital from treasury stock

    ($1,020,000$840,000)

 180,000
  (To record sale of treasury stock for above the cost price)  
 
October1Cash Dividends                                        (4)                                                        202,800 
       Cash Dividends Payable 202,800
  (To record the declaration of cash dividends)  
 
October1Stock Dividends                                       (6)856,800 
  

    Common Stock Dividends Distributable                           

                                                                  (7)

 595,000
  

    Paid-in Capital in excess of Stated 

    Value-Common stock                          (8)

 261,800
  (To record the declaration of stock dividends)  
 
December1Cash Dividends Payable                         (4)                                                        202,800 
       Cash  202,800
  (To record the payment of cash dividends)  
 
December1Common Stock Dividends Distributable (7)                                595,000 
      Common Stock 595,000
  (To record the distribution of stock dividends)  

Table 1

Explanation of Solution

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.

Stated value: It refers to an amount per share, which is assigned by the board of directors to no par value stock.

Issue of common stock for non-cash assets or services: Corporations often issue common stock for the services received from attorneys or consultants as compensation, or for the purchase of non-cash assets such as land, buildings, or equipment.

Retained earnings statement

This is a financial statement that shows the amount of the net income retained by a company at a particular point of time for reinvestment and pays its debts and obligations. It shows the amount of retained earnings that is not paid as dividends to the shareholders.

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.

Working note:

Compute number of common shares outstanding after the purchase of treasury stock on February 28.

    Number of shares outstandingafter the purchase of treasury stockon February 28}=[Number of shares outstandingas of January 9  Numberof treasury shares purchasedon February 28]=1,200,000 shares 40,000 shares=1,160,000 shares

   (1)

Compute the amount of total cash dividends declared on May 1.

    Amount of total cash dividendsdeclared on May 1} =[Cash divided for preferrence shares +Cash divided for common shares +]=[(Number of preferrence shares×$0.80per share)+(Number of shares outstandingafter the purchase of treasury stockon February 28×$0.12 per share)]=[(75,000 shares×$0.80)+(1,160,000(1)×$0.12)]=$199,200

   (2)

Compute number of common shares outstanding after the sale of treasury stock on September 7.

    Number of shares outstandingafter the sale of treasury stockon September 7}=[Number of shares outstandingafter the purchase of treasury stockon February 28 +Numberof treasury shares soldon September 7]=1,160,000 shares(1)+30,000 shares=1,190,000 shares

   (3)

Compute the amount of total cash dividends declared on October 1.

    Amount of total cash dividendsdeclared on October 1} =[Cash divided for preferrence shares +Cash divided for common shares +]=[(Number of preferrence shares×$0.80per share)+(Number of shares outstandingafter the sale of treasury stockon September 7×$0.80per share)]=[(75,000 shares×$0.80)+(1,190,000(1)×$0.12)]=$202,800

   (4)

Compute the stock dividends shares.

  Stock dividends shares = {Number of shares outstanding afterthe sale of treasury stock on September 7×Stock dividend percentage}= 1,190,000 shares (3)× 2%= 23,800 shares                          

   (5)

Compute the stock dividends amount payable to common stockholders.

  Stock dividends = Stock dividend shares × Market value per share= 23,800 shares(5) × $36= $856,800                 

   (6)

Compute common stock dividends distributable value.

  Common stock dividenddistributable value} = Stock dividend shares × Par value of stock= 23,800 shares(5) × $25= $595,000                             

   (7)

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

  Paid-in capital = Stock dividends –Common stock dividend distributable value= $856,800(6) – $595,000(7)= $261,800      

   (8)

Note:

Stock split does not affect the accounting equation of assets, liabilities, or stockholders’ equity. It will affect only the number of shares outstanding and value per share. Hence, on January 9 no entry is passed.

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Chapter 12 Solutions

Financial And Managerial Accounting

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