Concept explainers
Recording Transactions Affecting Stockholders’ Equity
King Corporation began operations in January of the current year. The charter authorized the following stock:
Common stock: $5 par value, 85,000 shares authorized
During the current year, the following transactions occurred in the order given:
- a. Issued 66,000 shares of common stock for $9 cash per share.
- b. Sold 9,000 shares of the preferred stock at $20 cash per share.
- c. Sold 1,000 shares of the preferred stock at $20 cash per share and 2,500 shares of common stock at $10 cash per share.
Required:
Provide the
Prepare the journal entries for given transaction.
Explanation of Solution
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.
Par value:
It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.
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.
Journal entries for given transaction are as follows:
a. Issued 66,000 common shares at $9 per share:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) (2) | 594,000 | |||
Common stock (+SE) (1) | 330,000 | |||
Additional paid-in capital, common stock (+SE) (3) | 264,000 | |||
(To record the issuance of common stock) |
Table (1)
- Cash is an assets account and it increased the value of asset by $594,000. Hence, debit the cash account for $594,000.
- Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $330,000. Hence, credit the common stock for $330,000.
- Additional paid-in capital is a component of stockholder’s equity and it increased the value of stockholder’s equity by $264,000. Hence, credit the additional paid-in capital for $264,000.
Working note:
Calculate the value of common stock
Calculate the total cash received
Calculate the value of additional paid in capital
b. Issued 9,000 shares of preferred stock at $20 each:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) (5) | 180,000 | |||
Preferred stock (+SE) (4) | 90,000 | |||
Additional paid-in capital, preferred stock (+SE) (6) | 90,000 | |||
(To record the issuance of preferred stock) |
Table (2)
- Cash is an assets account and it increased the value of asset by $180,000. Hence, debit the cash account for $180,000.
- Preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $90,000. Hence, credit the preferred stock for $90,000.
- Additional paid-in capital, preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $90,000. Hence, credit the additional paid-in capital, preferred stock account for $90,000.
Working note:
Calculate the value of preferred stock
Calculate the total cash received
Calculate the value of additional paid in capital, preferred stock
c. Issued 2,500 common shares at $10 per share and issued 1,000 shares of preferred stock at $20 each:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) (13) | 45,000 | |||
Preferred stock (+SE) (7) | 10,000 | |||
Common stock (+SE) (10) | 12,500 | |||
Additional paid-in capital, preferred stock (+SE) (9) | 10,000 | |||
Additional paid up capital, common stock(+SE) (12) | 12,500 | |||
(To record issuance of common stock and preferred stock) |
Table (3)
- Cash is an assets account and it increased the value of asset by $45,000. Hence, debit the cash account for $45,000.
- Preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $10,000. Hence, credit the preferred stock for $10,000.
- Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $12,500, Hence, credit the common stock for $12,500.
- Additional paid-in capital, preferred stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $10,000. Hence, credit the additional paid-in capital, preferred stock account for $10,000.
- Additional paid up capital, common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $12,500. Hence, credit the additional paid up capital, common stock account for $12,500.
Working note:
Calculate the value of preferred stock
Calculate the cash received from preferred stock
Calculate the value of additional paid in capital, preferred stock
Calculate the value of common stock
Calculate the cash received from common stock
Calculate the value of additional paid in capital
Calculate the value of total cash received from preferred stock and common stock
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Chapter 11 Solutions
Financial Accounting
- Selected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2016, were as follows: a. Issued 15,000 shares of 20 par common stock at 30, receiving cash. b. Issued 4, 000 shares of 80 par preferred 5% stock at 100, receiving cash. c. Issued 500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of 0.50 per share on common stock and 1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at 40 per share, plus a 150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at 33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for 24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 37 5. The bonds are classified as a held-to-maturity long -term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0 .60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 45, including commission. p. Recorded the payment of semiannual interest on the bonds issue d in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method . q. Accrued interest for three months on the Dream Inc. bonds purchased in (I). r. Pinkberry Co. recorded total earnings of 240 ,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39. 02 per share on December 31, 2016. The investment is adjusted to fair value , using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments h ad a beginning balance of zero. Instructions 1. Journalize the selected transactions. 2. After all of the transaction s for the year ended December 31, 201 6, had been poste d [including the transactions recorded in part (1) and all adjusting entries), the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step in come statement for the year ended December 31, 201 6, concluding with earnings per share . In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. ( Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 20 6. c. Prepare a balance sheet in report form as of December 31, 2016.arrow_forwardStockholders equity accounts and other related accounts of Gonzales Company as of January 1, 20--, the beginning of its fiscal year, are shown below. (a)Received 20,000 for the balance due on subscriptions for preferred stock with a par value of 40,000 and issued the stock. (b)Purchased 10,000 shares of common treasury stock for 18 per share. (c)Received subscriptions for 10,000 shares of common stock at 19 per share, collecting down payments of 45,000. (d)Issued 15,000 shares of common stock in exchange for land with a fair market value of 290,000. (e)Sold 5,000 shares of common treasury stock for Si00,000. (f)Issued 10,000 shares of preferred stock at 11.50 per share, receiving cash. (g)Sold 3,000 shares of common treasury stock for 17 per share. REQUIRED 1. Prepare general journal entries for the transactions, identifying each transaction by letter. 2. Post the journal entries to appropriate T accounts. The cash account has a beginning balance of 300,000. 3. Prepare the stockholders equity section of the balance sheet as of December 31, 20--. Net income for the year was 825,000 and dividends of 400,000 were paid.arrow_forwardCopper Corporation was organized in May. It is authorized to issue 50,000,000 shares of $200 par value 7% preferred stock. It is also authorized to issue 75,000,000 shares of $5 par value common stock. In its first year, the corporation has the following transactions: Journalize the transactions.arrow_forward
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