Fundamental Financial Accounting Concepts
Fundamental Financial Accounting Concepts
10th Edition
ISBN: 9781259918186
Author: Thomas P Edmonds, Christopher Edmonds, Frances M McNair, Philip R Olds
Publisher: McGraw-Hill Education
Question
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Chapter 11, Problem 28BP

a.

To determine

Prepare the journal entries for the given transactions, and post to the T-accounts.

a.

Expert Solution
Check Mark

Explanation of Solution

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, and expenses.

T-account:

T-account refers to an individual account, where the increase or decrease in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

  1. (a) The title of the account
  2. (b) The left or debit side
  3. (c) The right or credit side

Prepare the journal entries for the given transactions, and post to the T-accounts as follows:

1. Issuance of common stock at $10 par

DateAccount TitlesDebit ($)Credit ($)
Cash (1)150,000
Common Stock, $10 par150,000
(To record the issuance of common stock)

Table (1)

  • Cash is an asset account, and it increases the value of cash account by $150,000. Therefore, debit cash account for $150,000.
  • Common Stock is a component of stockholders’ equity and it increases the value of common stock by $150,000. Therefore, credit common Stock account for $150,000.

Working note:

Calculate the value of cash received from the issuance of common stock.

Cash received = Number of shares × Issued value of common stock= 15,000 shares × $10= $150,000 (1)

2. Issuance of 3,000 preferred shares at $20 par

DateAccount TitlesDebit ($)Credit ($)
Cash (2)260,000
Preferred Stock, $20 stated value (3)250,000
Paid-in Capital in Excess of stated value, PS(4)10,000
(To record the issuance of preferred stock)

Table (2)

  • Cash is an asset account, and it increases the value of cash account by $260,000. Therefore, debit cash account for $260,000.
  • Preferred Stock is a component of stockholders’ equity and it increases the value of common stock by $250,000. Therefore, credit preferred Stock account for $250,000.
  • Paid-in Capital in Excess of stated value –Preferred stock is a component of stockholders’ equity and it increases the value of preferred stock by $10,000. Therefore, credit paid-in Capital in Excess of stated value account for $10,000.

Working note:

Calculate the value of cash received from the issuance of preferred stock

Cash received = Number of shares × Issued value of preferred stock= 5,000 shares × $52= $260,000 (2)

Calculate the value of common stock issued at par value

Preferred stock value} = Number of shares × Par value of preferred stock= 5,000 shares × $50= $250,000 (3)

Calculate the value of paid-in capital in excess of par value.

Paid-in capital in excess of stated value} = (Cash received (2)Preferred stock value (3) )= $260,000 – $250,000= $10,000 (4)

3. Purchased 800 shares of common stock as treasury stock for $12 per share:

DateAccount TitlesDebit ($)Credit ($)
Treasury Stock (Common Stock) (5)9,600
Cash9,600
(To record purchase of treasury stock)

Table (3)

  • Treasury stock is contra-stockholders’ equity account with a normal balance of debit. Thus, when treasury stocks are purchased, it decreases the stockholders’ equity account. In this case, it reduces the stockholders’ equity by $9,600. Therefore, treasury stock account is debited with $9,600.
  • Cash is an asset account, and it decreases the value of cash account by $9,600. Therefore, credit cash account for $9,600.

Working note:

Calculate the value of treasury stock:

Treasury stock = [Number of repurchase shares× Value of per share]=800×$12 per share=$9,600 (5)

4. Declared a $5,000 cash dividends on preferred stock

DateAccount TitlesDebit ($)Credit ($)
Dividends (6)12,500
Dividends Payable12,500
(To record dividends declared to the shareholders)

Table (4)

  • Dividends are a component of stockholder’s and it decreases the value of retained earnings by $12,500. Hence, debit the dividends account by $12,500.
  • Dividends payable is a liability account and it increases the value of liability by $12,500. Hence, credit the dividends payable account by $12,500.

Working note:

Calculate the preferred dividends during the current year

Dividends  = (Number of shares×Par value per share×Dividends percentage)=5,000 shares×$50 per share×5100=$12,500 (6)

5. Sold 500 share of treasury stock for $14 per share

DateAccount TitlesDebit ($)Credit ($)
Cash (7)4,800
Treasury Stock (8)3,600
Paid in capital in excess of Cost-TS (9)1,200
(To record sale of treasury stock for above the cost price)

Table (5)

  • Cash is an asset account, and it increases the value of cash account by $4,800. Therefore, debit cash account for $4,800.
  • Treasury stock is contra-stockholders’ equity account with a normal balance of debit. Thus, when treasury stocks are sold at its cost price, then cash would be debited and treasury stock would be credited. But, when treasury stocks are sold for higher than its cost price, then cash would be debited and treasury stock would be credited for cost price, and paid-in capital from treasury stock would be credited for excess selling price.

Working note:

Calculate the value of cash received from the resold of treasury stock.

Cash received = Number of resold shares × Selling price per share= 300 shares × $16= $4,800 (7)

Calculate the value of treasury stock resold at original cost

Treasury stock  = Number of resold shares × Original cost per share= 300 shares × $12= $3,600 (8)

Calculate the value of paid-in capital in excess of cost, TS.

Paid-in capital in excess of cost} = (Cash received (7)Common stock value (8) )= $4,800 – $3,600= $1,200 (9)

6. Dividends paid to shareholders

DateAccount TitlesDebit ($)Credit ($)
Dividends Payable12,500
Cash12,500
(To record dividends paid to shareholders)

Table (6)

  • Dividends payable is a liability account and it decreases the value of liability by $12,500. Hence, debit the dividends payable for $12,500.
  • Cash is an assets account and it decreases the value of asset by $12,500. Hence, credit the cash account for $12,500.

7. Earned cash revenues of $80,000 incurred cash expenses of $48,000

DateAccount TitlesDebit ($)Credit ($)
Cash80,000
Service Revenue80,000
(To record service revenue received from customers)

Table (7)

  • Cash is an asset account, and it increases the value of cash account by $80,000. Therefore, debit cash account for $80,000.
  • Service revenue is a component of stockholder’s equity, and it decreases the value of stockholder’s equity by $80,000. Therefore, credit the service revenue account for $80,000
DateAccount TitlesDebit ($)Credit ($)
Operating Expenses48,000
Cash48,000
(To record the cash paid to operating expense)

Table (8)

  • Operating expense is an expense account, and it decreases the value of stockholder’s equity by $48,000. Hence, debit the dividends account for $48,000.
  • Cash is an assets account and it decreased the value of asset by $48,000. Hence, credit the cash account for $48,000.

8. Close revenue, expense, and dividends accounts

DateAccount TitlesDebit ($)Credit ($)
Service Revenue80,000
Retained Earnings80,000
(To close service revenue account)
Retained Earnings48,000
Operating Expenses48,000
(To close operating expense account)
Retained Earnings12,500
Dividends12,500
(To close dividends account)

Table (9)

Closing entry for revenue account:

In this closing entry, the service revenue is closed by transferring the amount of service revenue accounts to retained earnings in order to bring the revenue account balance to zero. Hence, debit the service revenue account for $80,000, and credit the retained account for $80,000.

Closing entry for expenses account:

In this closing entry, operating expense accounts is closed by transferring the amount of operating expense to the retained earnings in order to bring the expense account balance to zero. Hence, debit the retained earnings for $48,000 and credit operating expense account for $48,000.

Closing entry for dividends account:

In this closing entry, the dividends account is closed by transferring the amount of dividends to retained earnings in order to bring the dividends account balance to zero. Hence, debit the retained earnings for $12,500 and credit dividends account for $12,500.

9. Appropriated $6,000 of retained earnings

DateAccount TitlesDebit ($)Credit ($)
Retained Earnings6,000
Appropriated Retained Earnings6,000
(To close appropriate retained earnings account)

Table (10)

T-accounts:

Cash
1. 150,0003. 9,600
2. 260,0006. 12,500
5. 4,8007. 48,000
7. 80,000
Bal. 424,700
Dividends Payable
6. 12,5004. 12,500
Bal. 0
Retained Earnings
cl 8. 60,500cl 8 80,000
cl 9. 6,000
Bal. 13,500
Appropriated Retained Earnings
cl 9. 6,000
Bal. 6,000
Preferred Stock
2. 250,000
Bal. 250,000
Common Stock
1. 150,000
Bal. 150,000
Paid in capital in excess of stated value - Preferred stock
2. 1,000
Bal. 1,000
Paid in capital in excess of cost-treasury stock
5. 1,200
Bal. 1,200
Treasury Stock
3. 9,6005. 3,600
Bal. 6,000
Dividends
4. 12,500cl 8. 12,500
Bal. 0
Service Revenue
cl 8. 80,0007. 80,000
Bal. 0
Operating Expenses
7. 48,000cl 8. 48,000
Bal. 0

b.

To determine

Prepare the stockholders’ equity section of the balance sheet as of December 31, Year 1.

b.

Expert Solution
Check Mark

Explanation of Solution

Stockholders’ Equity Section:

Stockholder’s equity section is the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.

Prepare the stockholders’ equity section of the balance sheet as of December 31, Year 1as follows:

Company R
Balance Sheet (partial)
As of December 31,Year 1
$$
Stockholders’ Equity:
Preferred Stock, $50 stated value, 5,000 shares issued and outstanding250,000
Common Stock, $10 par value, 15,000 shares issued and 14,500 shares outstanding150,000
Paid in capital in excess of stated value- Preferred stock10,000
Paid-In Capital in Excess of Cost-Treasury Stock1,200
Total Paid-In Capital411,200
Retained Earnings
Appropriated6,000
Unappropriated13,500
Total Retained Earnings19,500
Less: Treasury Stock (500 shares)(6,000)
Total Stockholders’ Equity424,700

Table (11)

Therefore, the total stockholder’s equity at the end of the accounting year 1 is $424,700.

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Chapter 11 Solutions

Fundamental Financial Accounting Concepts

Ch. 11 - Prob. 11QCh. 11 - Prob. 12QCh. 11 - Prob. 13QCh. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - Prob. 16QCh. 11 - Prob. 17QCh. 11 - Prob. 18QCh. 11 - Prob. 19QCh. 11 - Prob. 20QCh. 11 - Prob. 21QCh. 11 - Prob. 22QCh. 11 - Prob. 23QCh. 11 - Prob. 24QCh. 11 - Prob. 25QCh. 11 - Prob. 26QCh. 11 - Prob. 27QCh. 11 - Prob. 28QCh. 11 - Prob. 29QCh. 11 - Prob. 30QCh. 11 - Prob. 31QCh. 11 - Prob. 32QCh. 11 - Prob. 1AECh. 11 - Prob. 2AECh. 11 - Prob. 3AECh. 11 - Prob. 4AECh. 11 - Prob. 5AECh. 11 - Prob. 6AECh. 11 - Prob. 7AECh. 11 - Prob. 8AECh. 11 - Prob. 9AECh. 11 - Prob. 10AECh. 11 - Prob. 11AECh. 11 - Prob. 12AECh. 11 - Prob. 13AECh. 11 - Prob. 14AECh. 11 - Prob. 15AECh. 11 - Prob. 16AECh. 11 - Prob. 17AECh. 11 - Prob. 18AECh. 11 - Prob. 19AECh. 11 - Prob. 20AECh. 11 - Prob. 21APCh. 11 - Prob. 22APCh. 11 - Prob. 23APCh. 11 - Prob. 24APCh. 11 - Prob. 25APCh. 11 - Prob. 26APCh. 11 - Prob. 27APCh. 11 - Prob. 28APCh. 11 - Prob. 29APCh. 11 - Prob. 30APCh. 11 - Prob. 1BECh. 11 - Prob. 2BECh. 11 - Prob. 3BECh. 11 - Prob. 4BECh. 11 - Prob. 5BECh. 11 - Prob. 6BECh. 11 - Prob. 7BECh. 11 - Prob. 8BECh. 11 - Prob. 9BECh. 11 - Prob. 10BECh. 11 - Prob. 11BECh. 11 - Prob. 12BECh. 11 - Prob. 13BECh. 11 - Prob. 14BECh. 11 - Prob. 15BECh. 11 - Prob. 16BECh. 11 - Prob. 17BECh. 11 - Prob. 18BECh. 11 - Prob. 19BECh. 11 - Prob. 20BECh. 11 - Prob. 21BPCh. 11 - Prob. 22BPCh. 11 - Prob. 23BPCh. 11 - Prob. 24BPCh. 11 - Prob. 25BPCh. 11 - Prob. 26BPCh. 11 - Prob. 27BPCh. 11 - Prob. 28BPCh. 11 - Prob. 29BPCh. 11 - Prob. 30BPCh. 11 - Prob. 1ATCCh. 11 - Prob. 3ATCCh. 11 - Prob. 4ATCCh. 11 - Prob. 5ATCCh. 11 - Prob. 6ATCCh. 11 - Prob. 7ATCCh. 11 - Prob. 8ATCCh. 11 - Prob. 9ATCCh. 11 - Prob. 10ATCCh. 11 - Prob. 1CP
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