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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

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

Chapter 16, Problem 4P, Youve been hired to perform an audit of Hubbard Company for the year ended December 31, 2019. You , example  1

Because of the antiquated terminology and negative balance, you examine the Capital Surplus account and find the following entries:

Chapter 16, Problem 4P, Youve been hired to perform an audit of Hubbard Company for the year ended December 31, 2019. You , example  2

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. 1. Prepare whatever journal entries are necessary to eliminate the Capital Surplus account and to correct Hubbard’s shareholders’ equity accounts.
  2. 2. Prepare a corrected shareholders’ equity section of Hubbard’s December 31, 2019, balance sheet. Include any related notes to its financial statements.

1.

To determine

Prepare journal entry to eliminate the Capital surplus account and to correct the Company H’s shareholder’s equity account.

Explanation

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:

DateAccount Titles and explanationDebit ($)Credit ($)
 Capital  surplus30,100 
 

     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 $3,000.
DateAccount Titles and explanationDebit ($)Credit ($)
 Capital  surplus16,000 
      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.

To determine

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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