Concept explainers
Reporting Stockholders' Equity and Determining Dividend Policy
Incentive Corporation was authorized to issue 12,000 shares of common stock, each with a $1 par value. During its first year, the following selected transactions were completed:
- a. Issued 6,000 shares of common stock for cash at $20 per share.
- b. Issued 2,000 shares of common stock for cash at $23 per share.
Required:
- 1. Show the effects of each transaction on the
accounting equation. - 2. Give the
journal entry required for each of these transactions. - 3. Prepare the stockholders’ equity section as it should be reported on the year-end balance sheet. At year-end, the accounts reflected a profit of $100.
- 4. Incentive Corporation has $30,000 in the company’s bank account. What is the maximum amount of cash dividends the company can declare and distribute?
1.
To show: The effects of each transaction on the accounting equation.
Explanation of Solution
Accounting equation:
Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
- a. Issued 6,000 shares of common stock for cash at $20per share.
Assets | Liabilities | Stockholders’ equity | |||
a. | Cash | +120,000(1) | No effect | Common stock Additional paid-in capital common |
+6,000(2) +114,000(3) |
Table (1)
- There is an increase in the asset (cash) by $120,000.
- There is an increase in the stockholders’ equity (Common stock) by $6,000 and increase in the additional paid in capital by $114,000.
Working note:
Calculate the amount of cash:
Calculate the amount of common stock:
Calculate the amount for additional paid in capital:
- b. Issued 2,000 shares of common stock for cash at $23per share.
Assets | Liabilities | Stockholders’ equity | |||
a. | Cash | +46,000(4) | No effect | Common stock Additional paid-in capital common |
+2,000(5) +44,000(6) |
Table (1)
- There is an increase in the asset (cash) by $46,000.
- There is an increase in the stockholders’ equity (Common stock) by $2,000 and increase in the additional paid in capital by $44,000.
Working note:
Calculate the amount of cash:
Calculate the amount of common stock:
Calculate the amount for additional paid in capital:
2.
To prepare: The journal entry for the given transactions.
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.
Prepare the journal entries:
- a. Issued 6,000 shares of common stock for cash at $20 per share
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
a. | Cash
|
120,000 | ||
Common stock
|
6,000 | |||
Additional paid in capital, common stock
|
114,000 |
|||
(To record the issuance of common stock to investors at premium) |
Table (1)
- Cash is an asset. There is an increase in the cash. Hence, debit cash account with $120,000.
- Common stock is a component of stockholders’ equity. There is an increase in the common stock which increases the stockholders’ equity. Hence, credit stockholders’ equity with $6,000.
- Additional paid in capital (common stock). There is an increase in the common stock which increases the stockholders’ equity. Hence, credit additional paid in capital with $114,000.
- b. Issued 2,000 shares of common stock for cash at $23 per share
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
a. | Cash
|
46,000 | ||
Common stock
|
2,000 | |||
Additional paid in capital, common stock
|
44,000 |
|||
(To record the issuance of common stock to investors at premium) |
Table (2)
- Cash is an asset. There is an increase in the cash. Hence, debit cash account with $46,000.
- Common stock is a component of stockholders’ equity. There is an increase in the common stock which increases the stockholders’ equity. Hence, credit stockholders’ equity with $2,000.
- Additional paid in capital (common stock). There is an increase in the common stock which increases the stockholders’ equity. Hence, credit additional paid in capital with $44,000.
3.
To prepare: The stockholders’ equity section of the balance sheet at 31st December.
Explanation of Solution
Stockholders’ Equity Section:
It is refers to the section of the balance sheet that shows the available balance of each stockholder’s equity account as on reported date at the end of the financial year.
Prepare the stockholders’ equity section of the balance sheet:
Balance sheet (Partial) | ||
Stockholders' equity -December 31,2013 | ||
Particulars | Amount($) | Amount($) |
Contributed capital: | ||
Common stock, par $1, authorized 12,000 shares, Outstanding shares
|
8,000 | |
Additional paid in capital, common stock
|
$158,000 | |
Total contributed capital | $166,000 | |
Retained earnings | $100 | |
Total stockholders' equity | $166,100 |
Table (3)
4.
Explanation of Solution
Stock Dividends:
It refers to the payment of dividends by a company to its existing shareholders, in the form of additional shares rather than cash. Stock dividends are paid, when there is inadequate cash available in the company.
The company can declare and distribute $100 as the maximum dividend and it have only $100 as the retained earnings.
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Chapter 11 Solutions
Fundamentals Of Financial Accounting
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