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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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Alert Company’s shareholders’ equity prior to any of the following events is as follows:

Chapter 16, Problem 5P, Alert Companys shareholders equity prior to any of the following events is as follows: The company

The company is considering the following alternative items:

  1. 1. An 8% stock dividend on the common stock when it is selling for $30 per share.
  2. 2. A 30% stock dividend on the common stock when it is selling for $32 per share.
  3. 3. A special stock dividend to common shareholders consisting of 1 share of preferred stock for every 100 shares of common stock. The preferred stock and common stock are selling for $123 and $31 per share, respectively.
  4. 4. A 2-for-1 stock split on the common stock, reducing the par value to $5 per share (assume the same date for declaration and issuance). The market price is $30 per share on the common stock.
  5. 5. A property dividend to common shareholders consisting of 100 bonds issued by West Company. These bonds are carried on the Alert Company books as an available-for sale investment at a fair value of $48,000 (which is also its cost); it has a current value of $54,000.
  6. 6. A cash dividend, consisting of a normal dividend and a liquidating dividend, on both the preferred and the common stock. The 10% preferred dividend includes a 2% liquidating dividend, and the $2.30 per share common dividend includes a $0.30 per share liquidating dividend (separate liquidating dividend contra accounts should be used).

    Required:

    For each of the preceding alternative items:

  7. 1. Record (a) the journal entry at the date of declaration and (b) the journal entry at the date of issuance.
  8. 2. Compute the balances in the shareholders’ equity accounts immediately after the issuance (any gains or losses are to be reflected in the retained earnings balance; ignore income taxes).

1.

To determine

Prepare journal entry to record the given transaction:

(a) The date of declaration.

(b) The date of issuance.

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.

Serial No.Account Titles and explanationDebit ($)Credit ($)

1

       (a)

Retained earnings (1,200×$30)36,000 
     Common stock to be distributed  12,000
 

    Additional paid-in capital  from stock

            dividend

 24,000
 ( To  record the declaration of stock  dividend)  
    
(b)Common stock to be distributed12,000 
     Common stock, $10 par 12,000
 ( To  record the issuance of stock  dividend)  
    

2

(a)

Retained earnings (4,500×$10)45,000 
     Common stock to be distributed  45,000
 ( To  record the declaration of stock  dividend)  
    
(b)Common stock to be distributed45,000 
     Common stock, $10 par 45,000
 ( To  record the issuance of stock  dividend)  
    

3

(a)

Retained earnings (150×$123)18,450 
     Preferred stock to be distributed  15,000
 

    Additional paid-in capital  from stock

            dividend

 3,450
 ( To  record the declaration of special stock  dividend)  
    
(b)Common stock to be distributed15,000 
     Common stock, $10 par 15,000
 (To record the issuance of special stock  dividend)  
    
4No entry is required  
    

5

(a)

Investment in Company W (1,000×$6[$54$48])6,000 
     Gain on disposal of investment  6,000
 (To record the gain on sale of investment)  
    
 Retained earnings

2.

To determine

Calculate the balances in the shareholder’s equity accounts after the issuance are being made.

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