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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

Entries for selected corporate transactions

Morrow Enterprises Inc. manufactures bathroom fixtures. The stockholders' equity accounts of Morrow Enterprises Inc., with balances on January 1, 20Y5, are as follows:

Common Stock, $20 stated value (500,000 shares authorized,375,000 shares issued) $7,500,000
Paid-In Capital in Excess of Stated Value—Common Stock 825,000
Retained Earnings 33,600,000
Treasury Stock (25,000 shares, at a cost of SIS per share) 450,000

The following selected transactions occurred during the year:

Jan. 22. Paid cash dividends of $0.08 per share on the common stock. The dividend had been properly recorded when declared on December 1 of the preceding fiscal year for $28,000.
Apr. 10. Issued 75,000 .shares of common stock for $24 per share.
June 6. Sold all of the treasury stock for $26 per share.
July 5. Declared a 4% stock dividend on common stock, to be capitalized at the market price of the stock, which is $25 per share.
Aug.15. Issued the certificates for the dividend declared on July 5.
Nov. 23.  Purchased 30,000 shares of treasury stock for $19 per share.
Dec. 28.  Declared a $0.10-per-share dividend on common stock.
31  Closed the two dividends accounts to Retained Earnings.

Instructions

  1. 1. Enter the January 1 balances in T accounts for the stockholders' equity accounts listed. Also prepare T accounts for the following: Paid-in Capital from Sale of Treasury Stock: Stock Dividends Distributable; Stock Dividends; Cash Dividends.
  2. 2. Journalize the entries to record the transactions and post to the eight selected accounts.
  3. 3. Prepare a retained earnings statement for the year ended December 31, 20Y5.
  4. 4. Prepare the Stockholders' Equity section of the December 31, 20Y5, balance sheet using Method 1 of Exhibit 8.

(1)

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.

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.

To Journalize: The transactions and post to the eight selected accounts.

Explanation

1. Record the transactions for Incorporation ME.

Date Account Titles and Explanation Debit ($) Credit ($)
20Y
January 22 Cash Dividends Payable                              28,000
     Cash 28,000
(To record the payment of cash dividends)
April 10 Cash (75,000 shares×$24) 1,800,000
      Common Stock (75,000 shares×$20) 1,500,000

      Paid-in Capital in Excess of stated value

      Common Stock

($1,800,000$1,500,000)

300,000
(To record issuance of 75,000 shares in excess of stated value)
June 6 Cash (25,000 shares × $26 per share) 650,000

     Treasury stock       

(25,000 shares ×$18 per share(1))

450,000

     Paid-in capital from treasury stock

($650,000$450,000)

200,000
(To record sale of treasury stock for above the cost price of $18 per share)
July 5 Stock Dividends                                       (4) 450,000

    Common Stock Dividends Distributable                         

                                                                  (5)

360,000

    Paid-in Capital in excess of Stated

    Value-Common stock                          (6)

90,000
(To record the declaration of stock dividends)
August 15 Common Stock Dividends Distributable (5) 360,000
    Common Stock 360,000
(To record the distribution of stock dividends)
November 23 Treasury stock (30,000 shares×$19 per share) 570,000
      Cash 570,000
(To record the purchase of 30,000 shares of treasury stock)
December 28 Cash Dividends                                        (8)                                                         43,800
     Cash Dividends Payable 43,800
(To record the declaration of cash dividends)
December 31 Retained Earnings 493,800
     Stock dividends                                  (4) 450,000
     Cash Dividends                                   (8) 43,800
(To record the closing of stock dividends and cash dividends to retained earnings account)

Table (1)

Working note:

Calculate treasury stock cost per share.

Treasury stock cost per share=[Total value of treasury stockat hand as on January 1, 20Y6][Number of treasury stockat hand as on January 1, 20Y6]=$450,00025,000 shares=$18 (1)

Compute number of shares outstanding after the sale of treasury stock on June 6.

Number of shares outstandingafter the sale of treasury stockon June 6}=[Number of shares outstandingas of January 1, 20Y6 + Numberof treasury shares issued on June 6]=375,000 shares +75,000 shares=450,000 shares (2)

Compute the stock dividends shares.

Stock dividends shares = {Number of shares outstanding afterthe sale of treasury stock on June 6×Stock dividend percentage}= 450,000 shares (2)× 4%= 18,000 shares (3)

Compute the stock dividends amount payable to common stockholders.

Stock dividends = Stock dividend shares × Market value per share= 18,000 shares(3) × $25= $450,000 (4)

Compute common stock dividends distributable value

(2)

To determine

To prepare: a retained earnings statement for the year ended December 31, 20Y6.

(3)

To determine

To prepare: The stockholders’ equity section of the December 31, 20Y6, balance sheet.

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