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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

Selected stock transactions

Diamondback Welding & Fabrication Corporation sells and services pipe welding equipment in Illinois. The following selected accounts appear in the ledger of Diamondback Welding & Fabrication Corporation at the beginning of the current fiscal year:

Preferred 2% Stock, $80 par (100,000 shares authorized 60,000 shares issued $ 4,800,000
Paid In Capital in Excess of Par Preferred Stock 210,000
Common Stock, $9 par (3,000,000 shares authorized, 1,750,000 shares issued...... 15.750,000
Paid In Capital in Excess of Par—Common Stock 1,400,000
Retained Earnings..... 52.840,000

During the year, the corpora lion completed a number of transactions affecting the stockholders' equity. They are summarized as follows:

  1. a. Purchased 87,500 shares of treasury common for $8 per share.
  2. b. Sold 55,000 shares of treasury common for $11 per share.
  3. c. Issued 20,000 shares of preferred 2% stock at $84.
  4. d. Issued 400,000 shares of common stock at 513, receiving cash.
  5. e. Sold 18,000 shares of treasury common for $7.50 per share.
  6. f. Declared cash dividends of $1.60 per share on preferred stock and $0.05 per share on common stock.
  7. g. Paid the cash dividends.

Instructions

Journalize the entries to record the transactions. Identify each entry by letter.

To determine

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.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

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.

To Journalize: The entries to record the transactions.

Explanation

A.

Record the purchase of 87,500 shares of treasury common stock at $8 per share.

Date Account Titles and Explanation Debit ($) Credit ($)
Treasury Stock 700,000
     Cash (87,500 shares×$8 per share) 700,000
(To record the purchase of 87,500 treasury stock)

Table (3)

Description:

Corporation D has repurchased 87,500 of its own treasury stock for $700,000.

  • Treasury stock is contra-stockholders’ equity account with a normal debit balance. Thus, when treasury stocks are purchased, it decreases the stockholders’ equity account. In this case, it reduces the stockholders’ equity by $700,000. Therefore, treasury stock account is debited with $700,000.
  • Cash is an asset. It is decreased as cash is paid for the purchase of treasury stock. Therefore, the cash account is credited with $700,000.

B.

Record the sale of 55,000 shares of treasury stock for cash at $11 per share.

Date Account Titles and Explanation Debit ($) Credit ($)
Cash (55,000 shares ×$11 per share) 605,000

Treasury stock

(55,000 shares × $8 per share)

440,000

Paid-in capital from treasury stock

($605,000$440,000)

165,000
(To record sale of treasury stock for above the cost price)

Table (4)

Description:

  • Cash is an asset. It is increased as cash is received from the sale of treasury stock. Therefore, the cash account is credited with $605,000.
  • Treasury stock is contra-stockholders’ equity account with a normal debit balance. 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.

C.

Record the issuance of par value preferred stock.

Date Account Titles and Explanation Debit ($) Credit ($)
Cash (20,000 shares×$84) 1,680,000
      Preferred Stock (20,000 shares×$80) 1,600,000

      Paid-in Capital in Excess of Par value –

Preferred Stock ($1,680,000$1,600,000)

80,000
(To record issuance of 20,000 preferred shares in excess of par)

Table (2)

Description:

  • Cash is an asset account. The amount is increased, because cash is received upon stock issued. Therefore, debit Cash account with the amount of cash received.
  • Preferred Stock is a stockholders’ equity account and the amount is increased due to issuance of common stock. Therefore, credit Common Stock account with the value of common stock.
  • Paid-in Capital in Excess of Par Value is a stockholders’ equity account and the amount is increased due to increase in capital. Therefore, credit Paid-in Capital in Excess of Par Value account with the excess amount of cash received over the Preferred Stock value.

D.

Record the issuance of common stock.

Date Account Titles and Explanation Debit ($) Credit ($)
Cash (400,000 shares×$13) 5,200,000
      Common Stock (400,000 shares×$5) 2,000,000

      Paid-in Capital in Excess of Par value –

Common Stock ($5,200,000$2,000,000)

3,200,000
(To record issuance of 400,000 shares in excess of par)

Table (1)

Description:

  • Cash is an asset account

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