Chapter 13, Problem 2APSA

To determine

Concept Introduction:

Stockholders Equity Transactions:

Stockholders equity Transactions refer to, transactions carried out by an organisation by issuing its shares. The main purpose of issuance of shares is to raise funds, but shares could also be issued, to pay dividends in the form of "Stock Dividends", Pay off Lenders, Creditors, Promoters in lieu of Cash etc.

Requirement 1

Journal Entries of Stockholders Equity Transactions.

Answer to Problem 2APSA

Date	Particulars		Debit	Credit
Jan-02	Treasury Stock		80000
	To Cash			80000
	(Being own Shares Purchased)
Jan-05	Dividend		72000
	To Dividend Payable			72000
	(Being dividend declared @ $2 per share)
Feb-28	Dividend Payable		72000
	To Cash			72000
	(Being Dividend paid)
Jul-06	Cash		36000
	To Treasury Stock			30000
	To Paid In Capital in Excess of Treasury		6000
	(Being 1500 Shares Sold for $24 each)
Aug-22	Cash		42500
	Paid in Capital in Excess of Treasury		6000
	Retained Earnings		1500
	To Treasury Stock			50000
	(Being Treasury Stock Sold at a loss)
Sep-05	Dividend		80000
	To Dividend Payable			80000
	(Being dividend declared @ $2 per share)
Oct-28	Dividend Payable		80000
	To Cash			80000
	(Being Dividend paid)
Dec-31	Income Summary		388000
	To Retained Earnings			388000
	(Being Income Summary Closed)

Explanation of Solution

The above solution can be explained as below:

1. The organisation purchased 4000 shares, thus the purchase will be treated as purchase of treasury stock. Treasury Stock is nothing, but the organisation buying its own shares to either increase the demand of its shares in the market, or restrict its voting powers. In this case Treasury stock will be debited and cash will be credited, exactly by the amount paid for such shares. Which is $20 per share, and comes to a total of $80000.
2. When dividend is declared, dividend will be debited and dividend payable will be credited to create a liability account. Since total outstanding shares are 36000(Excluding Treasury stocks purchased), and dividend is paid at $2 per share, thus the total dividend will be $72000.
3. Dividend provision made in above entry has been paid thus, dividend payable will be debited and cash will be credited.
4. 1500 Treasury shares purchased have been sold @$24 per share, Thus Treasury stock will be credited by $30000(1500*$20) and $6000 will be credited the Paid in Capital in excess of Treasury. Cash will be debited by total amount of $36000(1500*$24).
5. 2500 Treasury shares purchased have been sold @$17 per share, Thus Treasury stock will be credited by $50000(2500*$20) and $6000 will be debited from the Paid in Capital in excess of Treasury and Remaining amount of Loss of $1500 will be debited from Retained Earnings. Cash will be debited by total amount of $42500(2500*$17).
6. When dividend is declared, dividend will be debited and dividend payable will be credited to create a liability account. Since total outstanding shares are 40000, and dividend is paid at $2 per share, thus the total dividend will be $80000.
7. Dividend provision made in above entry has been paid thus, dividend payable wull be debited and cash will be credited.
8. Income Summary is an account Balance which remains after closing all revenue and expense accounts. Thus Income Summary has a credit balance of $388000, which will be debited and retained earnings will be credited.

To determine

Concept Introduction:

Retained Earnings:

Retained Earnings comprises amounts of Net Income that have not been distributed as dividend, but have been saved for further development of the organisation. Besides Net Income other entries like Stock dividend, Sale of Treasury Stock, Dividends paid off are also routed through the retained earnings account.

Requirement 2

Statement of Retained Earnings.

Answer to Problem 2APSA

Particulars	$
Beginning Balance of Retained Earnings	270000
Add: Net Income	388000
Less Dividend	-152000
Less:Loss on Sale of Treasury Stock	-1500
Ending Balance of Retained Earnings	504500

Explanation of Solution

As given in the Question Retained Earnings have a balance of $270000, Thus, Total Dividend of $152000 will be reduced and Net Income of $388000 will be added. Also loss in sale of Treasury Stocks will be reduced, Which will amount to $504500 as ending retained earnings.