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Intermediate Accounting: Reporting...
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Intermediate Accounting: Reporting...
You’ve been hired to perform an audit of Hubbard Company for the year ended December 31, 2019. You find the following account balances related to shareholders’ equity:
Because of the antiquated terminology and negative balance, you examine the Capital Surplus account and find the following entries:
Your examination of the Preferred Stock and Common Stock accounts reveals that the amounts shown correctly state the total par value of the issued capital stock. The Retained Earnings account contains the accumulated earnings of the company, with the exception of any items of retained earnings that were inappropriately debited or credited to the Capital Surplus account.
Required:
- 1. Prepare whatever journal entries are necessary to eliminate the Capital Surplus account and to correct Hubbard’s shareholders’ equity accounts.
- 2. Prepare a corrected shareholders’ equity section of Hubbard’s December 31, 2019, balance sheet. Include any related notes to its financial statements.
1.
Prepare journal entry to eliminate the Capital surplus account and to correct the Company H’s shareholder’s equity account.
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.
Prepare journal entry to eliminate the Capital surplus account:
| Date | Account Titles and explanation | Debit ($) | Credit ($) |
| Capital surplus | 30,100 | ||
|
Additional paid-in capital on common stock | 27,100 | ||
|
Additional paid-in capital on preferred stock | 3,000 | ||
| ( To eliminate the capital surplus account) |
(Table 1)
- Capital surplus is a component of stockholders equity and there is a decrease in the value of the equity. Hence, debit the capital surplus by $30,100.
- Additional paid-in capital on common stock is a component of stockholders equity and there is an increase in the value of the equity. Hence, debit the additional paid-in capital on common stock by $27,100.
- Additional paid-in capital preferred stock is a component of stockholders equity and there is an increase in the value of the equity. Hence, debit the additional paid-in capital on preferred stock by $3,000.
| Date | Account Titles and explanation | Debit ($) | Credit ($) |
| Capital surplus | 16,000 | ||
| Unrealized capital from donation of land | 16,000 | ||
| ( To record the unrealized capital from the donation of land) |
(Table 2)
- Capital surplus is a component of stockholders equity and there is a decrease in the value of the equity. Hence, debit the capital surplus by $16,000.
- Unrealized capital from donation of land is a component of stockholders equity and there is an increase in the value of the equity...
2.
Compute the corrected shareholder’s equity section of Company H’s December 31, 2019, balance sheet and also provide necessary notes to its financial statements.
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