Chapter 16, Problem 15P

Included in the December 31, 2018, Jacobi Company balance sheet was the following shareholders’ equity section:

The company engaged in the following stock transactions during 2019:

Required:

1. 1. Prepare journal entries to record the preceding transactions.
2. 2. Prepare the December 31, 2019, shareholders’ equity section (assume that 2019 net income was $270,000).

To determine

Prepare journal entry to record the given transactions.

Explanation of Solution

Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.

Prepare journal entry to record the given transactions.

Date	Account Titles and explanation	Debit ($)	Credit ($)
January 4, 2019	Dividend payable: Preferred $\left(\left(\$6\times 0.5\right)\times 2,000\right)$	6,000
	Dividend payable: Common (1)	46,400
	Cash		52,400
	(To record declaration of preferred and common stock)
January 5, 2019	Cash $\left(500\times \$110\right)$	55,000
	Preferred stock, $100 par		50,000
	Additional paid-in capital on preferred stock		5,000
	( To record issuance of preferred stock)
January 22, 2019	Cash $\left(4,000\times \$23\right)$	92,000
	Common stock, $5 par		20,000
	Additional paid-in capital on common stock		72,000
	( To record issuance of common stock)
April 2, 2019	Cash $\left(700\times \$24\right)$	16,800
	Treasury stock $\left(700\times \$20\right)$		14,000
	Additional paid-in capital on treasury stock		2,800
	(To record the reissuance of treasury stock)
May 14, 2019	Retained earnings (2)	84,250
	Common stock to be distributed      $\left(3,370\times \$5\right)$		16,850
	Additional paid-in capital from stock dividend		67,400
	(To record declaration of stock dividend)
June 4, 2019	Retained earnings	7,500
	Dividends payable: Preferred (3)		7,500
	(To record the declaration of annual per share dividend to the preferred)
August 29, 2019	Common stock to be  distributed	16,850
	Common stock, $5 par		16,850
	(To record the issuance of stock dividend)
July 5, 2019	Dividends payable: Preferred stock	7,500
	Cash		7,500
	(To record the amount of dividend paid on preferred stock)
July 20, 2019	No entry is required
August 3 ,2019	Loss on disposal of investment $\left(500\times \left[\$900-\$400\right]\right)$	25,000
	Unrealized decrease in the value of available-for-sale of securities       $\left(50\times \left[\$900-\$600\right]\right)$		15,000
	Allowance for change in value investment      $\left(500\times \left[\$600-\$400\right]\right)$		10,000
	(To record the declaration of property  dividend)
	Retained earnings $\left(5,000\times \$4\right)$	20,000
	Property dividend payable		20,000
	(To record the current value of the bond)
September 1,2019	Property dividend payable	20,000
	Allowance  for  change in value of    investment	25,000
	Investment in Company A stock		45,000
	(To record the issuance of property dividend)
December 3, 2019	Retained earnings	74,226
	Dividends payable: Preferred (3)		7,500
	Dividends payable: Common (4)		66,726
	(To record the declaration of annual per share dividend to the preferred and common stock)

Table (1)

Note:

Note 1: On July 20 memorandum entry is made as the common stock split two for one and the par value is reduced from $5 to $2.50.

Note 2: On July 20 memorandum entry is made when number of shares issued on common stock increases from 37,370 $\left[34,000+3,370\text{ stock dividend}\right]$ to 74,740 shares and when the number of treasury stock increases from 300 to 600 by decreasing the cost to $10 per share.

Working note (1): Calculate the amount of dividend payable to the common stock:

$\begin{array}{c}\begin{array}{l}\text{Amount of dividend payable}\\ \text{to the common stock}\end{array}\}\text{=}\left(\begin{array}{l}\text{Common stock shares}-\\ \text{Treasury shares issued}\end{array}\right)\times \text{Dividend per share}\\ \text{=}\left(\text{30,000}-1,000\right)\times \$1.60\\ =\$46,400\end{array}$

Working note (2): Calculate the amount of retained earnings:

Particulars	Amount in $
Shares issued	34,000
Less: Treasury shares	300
Shares outstanding  $\left(A\right)$	33,700
Multiply: Stock dividend $\left(B\right)$	10%
Shares  in stock dividend $\left(A\times B\right)$	3,370
Multiply: Current market price	$25
Reduction in retained earnings	84,250

Table (2)

Working note (3): Calculate the amount of dividend payable to the preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Amount of dividend payable }\\ \text{to the preferred stock}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Number of preferred shares }\\ \text{+Additional shares issued}\end{array}\right)\times \left(\begin{array}{l}\text{Value of}\\ \text{ dividend}\end{array}\right)\times \text{Time period}\\ \text{=}\left(2,000+500\right)\times \$6\times \frac{1}{2}\text{ Years}\\ =\$7,500\end{array}$

Working note (4): Calculate the amount of dividend payable to the common stock:

$\begin{array}{c}\begin{array}{l}\text{Amount of dividend payable }\\ \text{to the common stock}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Number of common stock }\\ -\text{Treasury stock dividend }\\ \text{available}\end{array}\right)\times \text{Dividend per share}\\ \text{=}\left(74,740-600\right)\times \$0.90\\ =\$66,726\end{array}$

To determine

Prepare Company J’s statement of stockholder’s equity section for 2019.

Explanation of Solution

Prepare Company J’s statement of stockholder’s equity section for 2019.

Company J
Shareholder's equity
For the  year ended December 31, 2019
Particulars	Amount in $
Contributed Capital:
Preferred stock (6%, $100 par, 2,500 shares issued and outstanding)	250,000
Additional paid-in capital on preferred stock $\left(\$12,000+\$5,000\right)$	17,000
Common stock ($2.50 par, 74,740 shares issued of which 600 are in the corporate treasury)	186,850
Additional paid-in capital on common stock $\left(\$240,000+\$72,000\right)$	312,000
Additional paid-in capital from treasury stock	2,800
Additional paid-in capital from stock dividend	67,400
Total contributed capital	836,050
Retained earnings (restricted in the amount of $6,000, the cost of the treasury shares) (5)	711,024
Accumulated other comprehensive income (loss):
Unrealized decrease in value of available-for-sale securities $\left(\$41,000+\$15,000\right)$	(26,000)
Total contributed capital, retained earnings, and accumulated other comprehensive income	1,521,074
Less: Treasury stock (600 shares of common at $10 per share)	(6,000)
Total Shareholders’ Equity	1,515,074

 (Table 3)

(5) Calculate the amount of retained earnings:

$\begin{array}{c}\begin{array}{l}\text{Amount of retained }\\ \text{earnings}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Opening balance+Net income}-\text{Reduction in the }\\ \text{retained earnings}-\text{Dividend paid on preferred }\\ \text{stock}-\text{Property dividend paid}-\text{Dividend paid}\\ \text{ on preferred and common stock }\end{array}\right)\\ =\$627,000+\$270,000-\$84,250-\$7,500-\$20,000-\$74,226\\ =\$711,024\end{array}$