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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Reconstruct Journal Entries At the end of its first year of operations, Leo Company lists the following accounts and ending account balances related to stock transactions and dividends:

Chapter 15, Problem 15P, Reconstruct Journal Entries At the end of its first year of operations, Leo Company lists the

During the first year, the following events occurred:

  1. 1. Subscription contracts were entered into for common stock at $9 per share and preferred stock at $112 per share. Common stock subscriptions required a $2-per-share down payment. Preferred stock subscriptions required no down payment. Shares (either common or preferred) were issued to subscribers upon full payment.
  2. 2. One thousand shares of common stock were sold for $11 per share, and the stock was issued to shareholders.
  3. 3. Equipment with an appraised value of $69,000 was acquired by issuing 600 shares of preferred stock. The appraised value of the equipment was used to record the transaction.
  4. 4. Net income of $30,000 was closed to Retained Earnings from Income Summary at the end of the year.
  5. 5. Dividends of $8 per share on all the preferred stock outstanding and $1 per share on all the common stock outstanding were distributed at the end of the year (the company debited Retained Earnings and credited Cash for each dividend).

Required:

Next Level On the basis of the preceding information, reconstruct all the journal entries that the company made to record the stock transactions, net income, and dividends. It may be helpful to begin by using T-accounts and entering the ending balances.

To determine

Prepare the journal entries based on the given information to record the stock transactions, net income, and dividends.

Explanation

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

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.

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.

DateAccounts title and ExplanationPost ref.Debit ($)Credit ($)
aCash ($11×1,000) $11,000 
     Common stock, $5 stated value  $5,000
     Additional paid in capital on common stock  $6,000
 (To record the sale of common stock)   
     
bEquipment  $69,000 
     Preferred stock, $100 par  $60,000
     Additional paid in 0capital on preferred stock   $9,000
 (To record the issue of preferred  stock in exchange of equipment)   
     
cCash ($2×10,000) $20,000 
 Subscription receivable: common stock $70,000 
     Common stock subscribed ($5×1,000)  $50,000
     Additional paid in capital on common stock ($4×10,000)  $40,000
 (To record the common stock subscription)   
     
dCash ($70,000$14,000) $56,000 
     Subscription receivable: common stock  $56,000
 (To record the receipt of subscription receivable)   
     
eCommon stock subscribed $40,000 
     Common stock, $5 stated value  $40,000
 (To issue of common stock for common stock subscriptions)   

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