Chapter 13, Problem 2AP

1.

To determine

Prepare journal entries to record the transactions for 2016.

Explanation of Solution

Treasury stock: The shares which were reacquired or bought back by the company, but not formally retired from the corporation stock, are called as treasury stock. The re-acquisition of issued shares decreases the number of outstanding shares.

Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare journal entries to record the transactions as follows:

Date	Account Titles	Debit ($)	Credit ($)
January 1	Treasury Stock $\left(4,000\text{shares}\times \text{\$20}\right)$	80,000
	Cash		80,000
	(To record purchase of treasury stock)
January 5	Retained earnings $\left(36,000\text{shares}\times \text{\$2}\right)$	72,000
	Common dividend payable		72,000
	(To record the dividend declaration)
February 28	Common dividend payable	72,000
	Cash		72,000
	(To record the payment of cash dividend)
July 6	Cash $\left(1,500\text{shares}\times \text{\$24}\right)$	36,000
	Treasury Stock $\left(1,500\text{shares}\times \text{\$20}\right)$		30,000
	Paid-In Capital, Treasury stock     $\left(1,500\text{shares}\times \text{\$4}\right)$		6,000
	(To record sale of treasury stock for above the cost price)
August 22	Cash $\left(1,500\text{shares}\times \text{\$20}\right)$	42,500
	Paid-in Capital, Treasury stock	6,000
	Retained Earnings	1,500
	Treasury Stock, Common     $\left(1,500\text{shares}\times \text{\$25}\right)$		50,000
	(To record sale of treasury stock)
September 5	Retained earnings $\left(40,000\text{shares}\times \text{\$2}\right)$	80,000
	Common dividend payable		80,000
	(To record the dividend declaration)
October 28	Common dividend payable	80,000
	Cash		80,000
	(To record the payment of cash dividend)
December 31	Income summary	388,000
	Retained earnings		388,000
	(To close the income summary account)

Table (1)

2.

To determine

Prepare a statement of retained earnings for the year ended December 31, 2016.

Explanation of Solution

Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.

Prepare a statement of retained earnings for the year ended December 31, 2016 as follows:

Corporation K
Statement of Retained Earnings
For Year Ended December 31, 2016
Retained earnings, December 31, 2018	$270,000
Add: Net Income	388,000
	658,000
Less:    Cash dividends declared	(152,000)
Treasury stock reissuances	(1,500)
Retained earnings, December 31, 2016	$504,500

Table (2)

Conclusion

Therefore, retained earnings as on December 31, 2016 are $504,500.

3.

To determine

Prepare the stockholders’ equity section of the company’s balance sheet as of December 31, 2016.

Explanation of Solution

Balance Sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Stockholders’ Equity: Stockholders Equity refers to the right of the owner to possess over the resources of the business. Common stock and the retained earnings are the components of the Stockholders Equity.

Prepare the stockholders’ equity section of the company’s balance sheet as of December 31, 2016 as follows:

Corporation K
Stockholders’ Equity Section of the Balance Sheet
For Year Ended December 31, 2016
Common stock–$10 par value; 100,000 shares authorized, 40,000 shares issued and outstanding	$400,000
Paid-in capital in excess of par value, Common stock	60,000
Retained earnings (Refer part 2)	504,500
Total stockholders’ equity	$964,500

Table (3)