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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Stockholders' Equity section of balance sheet

List the errors in the following Stockholders' Equity section of the balance sheet prepared as of the end of the current year:

Stockholders' Equity
Paid in capital:
Preferred 2% stock. $80 par (125,000 shares authorized and issued)................................ $10,000,000  
Excess of issue price over par............................. 500,000 $ 10,500,000
Retained earnings.......................................   96,700,000
Treasury stock 175,000 shares at cost).....................   1,755,000
Dividends payable.......................................   430,000
Total paid-in capital..................................   $ 109,385,000
Common stock. $20 par (1,000,000 shares authorized. 825,000 shares issued).................................   17,655,000
Organizing costs.............................................   300,000
Total stockholders' equity.....................................   $127,340,000

To determine

Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance of stockholders’ equity as on reported date at the end of the financial year.

To list: The identified errors in the stockholders’ equity section of the balance sheet.

Explanation

List the identified errors in the stockholders’ equity section of the balance sheet.

  • Common stock is a paid in- capital, which should be reported immediately after preferred stock’s excess of issue price over par. 
  • Retained earnings are a part of stockholders’ equity, but it is not a part of paid in capital. Retained earnings must be presented after paid in capital.
  • Treasury stock refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement. Hence, the cost of treasury stock should be deducted from the total of paid in capital and retained earnings.
  • Dividends payable is a liability, which should reported on the liabilities section of the balance sheet, but not on the stockholders’ equity section.
  • Common stock amount must be $16,500,000 (825,000 shares issued×$20 par)   but not $17,655,000. The difference of $1,155,000  ($17,655,000$16,500,000) may represent excess of issue price over par.
  • Organizing costs is an expense, which should be expensed as organizational expense. Hence, it must not be included as a part of stockholders’ equity section. Instead organizational expense of $300,000 can be deducted from reported retained earnings of $96,700,000. Thereby, retained earnings can be corrected and reported as $96,400,000 ($96,700,000$300,000)  instead of $96,700,000.

Corrected stockholders’ equity section of the balance sheet would appear as follows:

Stockholders’ equity section
Particulars Amount ($) Amount ($) Amount ($)
Paid-in Capital:      

     Preferred 2% Stock, $80 par
    (125,000 shares authorized and

     issued)

$10,000,000    
     Excess over par $500,000  
         Paid in capital, preferred stock $10,500,000  

     Common Stock, $20 par

     (1,000,000 shares authorized,

  x

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