Chapter 11, Problem 2GLP

To determine

Stockholder’s Equity:

It is that part of the company's liabilities that are used to finance the operations of the business. They are the owner of the business. It generally has two types one is common stock and other is preferred stock.

Journal Entries:

It is a book of original entry. It records and summarizes financial transaction of an entity in chronological manner, generally according to dual aspect of accounting.

Accounting rules regarding journal entries:

• Balance increase when: Assets, losses and expenses get debited and liabilities, gains, and revenue get credited.
• Balance decrease when: Assets, losses and expenses get credited and liabilities, gains, and revenue get debited.

Treasury Stock:

It is the type of stock that company keeps with itself either by not issuing the shares or by buying back of shares.

1.

To prepare: Journal entry, numbers of shares outstanding, the amount of net income and the amount of retained earnings that is capitalized.

Explanation of Solution

Prepare journal entry.

Declared and paid a cash dividend:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Jan 5	Retained earnings		20,000
	cash			20,000
	(Being dividend is declared and paid )

Table (1)

• Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit retained earnings account
• Cash is an asset. Since, cash is used to pay dividend, it reduces asset. Hence credit cash account.

Declared and paid a cash dividend:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Apr. 5	Retained earnings		18,500
	cash			18,500
	(Being dividend is declared and paid )

Table (2)

• Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit retained earnings account
• Cash is an asset. Since, cash is used to pay dividend, it reduces asset. Hence credit cash account.

Declared and paid a cash dividend:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 5	Retained earnings		18,500
	cash			18,500
	(Being dividend is declared and paid )

Table (3)

• Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit retained earnings account
• Cash is an asset. Since, cash is used to pay dividend, it reduces asset. Hence credit cash account.

Declared and paid a stock dividend:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 31	Retained earnings		88,800
	Common stock			29,600
	Paid in capital in excess of par value, treasury stock			59,200
	(Being stock dividend is declared and paid )

Table (4)

• Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit retained earnings account
• Common stock is equity. Since, shares is issued, it increases equity. Hence, credit common stock account.
• Paid in capital in excess of par value, treasury stock is part of a shareholder’s fund. Since, money is received, it increases equity. Hence, credit paid in capital in excess of par value, treasury stock.

Declared and paid a cash dividend:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Oct 5	Retained earnings		22,200
	cash			22,200
	(Being dividend is declared and paid )

Table (5)

• Retained earnings are a part of equity. Since, dividend is being paid, it reduced equity. Hence debit retained earnings account
• Cash is an asset. Since, cash is used to pay dividend, it reduces asset. Hence credit cash account.

Calculate number of outstanding shares.

Formula for number of outstanding shares,

$\text{Number}\text{of}\text{Outstanding}\text{Shares}=\text{Issued}\text{Shares}-\text{Treasury}\text{Shares}$

Jan. 5

Given,

Issued shares are 40,000.

Treasury Shares are 0.

Substitute 40,000 for issue shares and 0 for treasury shares in the above formula.

$\begin{array}{c}\text{Number}\text{of}\text{Outstanding}\text{Shares}=40,000-0\\ =40,000\end{array}$

Hence, number of shares outstanding is 40,000.

Apr. 5

Given,

Issued shares are 40,000.

Treasury Shares are 3,000.

Substitute 40,000 for issue shares and 3,000 for treasury shares in the above formula.

$\begin{array}{c}\text{Number}\text{of}\text{Outstanding}\text{Shares}=40,000-3,000\\ =37,000\end{array}$

Hence, number of shares outstanding is 37,000.

July 5

Given,

Issued shares are 40,000.

Treasury Shares are 3,000.

Substitute 40,000 for issue shares and 3,000 for treasury shares in the above formula.

$\begin{array}{c}\text{Number}\text{of}\text{Outstanding}\text{Shares}=40,000-3,000\\ =37,000\end{array}$

Hence, number of shares outstanding is 37,000.

Oct. 5

Given,

Issued shares are 47,400.

Treasury Shares are 3,000.

Substitute 47,400 for issue shares and 3,000 for treasury shares in the above formula.

$\begin{array}{c}\text{Number}\text{of}\text{Outstanding}\text{Shares}=47,400-3,000\\ =44,400\end{array}$

Hence, number of shares outstanding is 44,400.

Net income earned by the company during the year 2017:

Formula to calculate net income during the year,

  $\text{Net}\text{Income}=\left(\begin{array}{l}\text{Closing}\text{Balance}\text{Of}\text{Retained}\text{Earnings}\\ -\text{Opening}\text{Balance}\text{Of}\text{Retained}\text{Earnings}\\ \text{+Dividend}\text{Paid}\text{During}\text{the}\text{Year}\end{array}\right)$

Substitute $400,000 for closing balance of retained earnings, $320,000 for opening balance of retained earnings and $168,000 for dividend paid during the year in the above formula.

$\begin{array}{c}\text{Net}\text{Income}=\$400,000-\$320,000+\$168,000\\ =\$248,000\end{array}$

Hence, the net income of the year is $248,000.

Amount of capitalization of retained earnings:

Amount of capitalization of retained earnings for stock dividend refer to that amount which is used from retained earnings account to issue common stock account and that amount is $88,800.

Working notes:

Calculation of number of shares issued,

$\begin{array}{c}\text{Number}\text{of}\text{shares}\text{issued}=\text{Number}\text{of}\text{outsanding}\text{shares}\times \text{Stock}\text{Dividend}\\ =37,000\times \frac{20}{100}\\ =7,400\end{array}$

Calculation of total amount capitalized,

  $\begin{array}{c}\text{Total}\text{Amount}\text{Capitalized}=\text{Number}\text{of}\text{shares}\text{issued}\times \text{Share}\text{price}\\ =7,400\times \$12\\ =\$88,800\end{array}$

Hence , total amount capitalized is $88,800.