Financial Accounting
Financial Accounting
18th Edition
ISBN: 9781260706307
Author: Jan Williams
Publisher: Mcgraw-hill Higher Education (us)
Question
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Chapter 12, Problem 6AP

a.

To determine

Journalize the stockholders’ equity transactions in the books of Incorporation TS.

a.

Expert Solution
Check Mark

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the stockholders’ equity transactions in the books of Incorporation TS.

Transaction on January 3:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2018
January3Dividends362,000
Dividends Payable362,000
 (Record declaration of dividends)

Table (1)

Description:

  • Dividends is a stockholders’ equity account. Since the dividends are declared, stockholders’ equity is decreased, and a decrease in equity account is debited.
  • Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute the amount of cash dividends on common stock.

Cash dividends={Number of common shares outstanding ×Dividend per share}=382,000 shares×$1 per share=$382,000

Transaction on February 15:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2018
February15Dividends Payable382,000
Cash382,000
 (Record payment of cash dividends)

Table (2)

Description:

  • Dividends Payable is a liability account. Since the liability to pay dividends has been paid off, liability decreased, and a decrease in liability is debited.
  • Cash is an asset account. The amount is decreased because cash is paid as dividends, and a decrease in assets should be credited.

Transaction on April 12:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2018
April12Treasury Stock240,000
Cash240,000
(Record reacquisition of common stock as treasury stock)

Table (3)

Description:

  • Treasury Stock is a stockholders’ equity account. Since the issued shares are bought back, the stockholders’ equity decreases, and a decrease in equity is debited.
  • Cash is an asset account. The amount is decreased because cash is paid as dividends, and a decrease in assets should be credited.

Working Notes:

Compute cash paid.

Cash paid= Number of shares reacquired× Purchase price per share= 6,000 shares × $40= $240,000

Transaction on May 9:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2018
May9Cash 176,000
Treasury Stock160,000
Additional Paid-in Capital–Treasury Stock16,000
 (Record sale of treasury stock)

Table (4)

Description:

  • Cash is an asset account. The amount is increased because cash is received on sale of reacquired shares, and an increase in assets should be debited.
  • Treasury Stock is a stockholders’ equity account. Since reacquired shares of treasury stock are sold, the value of treasury stock is reduced. The treasury stock which was debited previously, is now credited to reduce its balance.
  • Additional Paid-In Capital–Treasury Stock is a stockholders’ equity account. Since treasury stock is sold for a price more than its purchase price, equity value is increased. An increase in equity is credited.

Working Notes:

Compute cash received.

Cash received= Number of shares × Selling price= 4,000 shares × $44= $176,000

Compute treasury stock value.

Treasury stock = Number of shares × Purchase price= 4,000 shares × $40= $160,000

Compute additional paid-in capital value.

Paid-in capital value= Number of shares × (Selling price–Purchase price)= 4,000 shares × ($44–$40)= 4,000 shares × $4= $16,000

Transaction on June 1:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2018
June1Retained Earnings798,000
Stock Dividends to Be Distributed19,000
Additional Paid-in Capital: Stock Dividends779,000
(Record declaration of stock dividends)

Table (5)

Description:

  • Retained Earnings is a stockholders’ equity account. Since the dividends are declared, stockholders’ equity is decreased, and a decrease in equity account is debited.
  • Stock Dividends to Be Distributed is a stockholders’ equity account. Since common stock is declared to be distributed as stock dividends at par value, equity value is increased. An increase in equity is credited.
  • Additional Paid-in Capital: Stock Dividends is a stockholders’ equity account. Since the stock is issued in excess of par value, equity value is increased. An increase in equity is credited.

Working Notes:

Compute the number of shares to be distributed as stock dividends.

Stock dividends shares = {Number of shares outstanding ×Stock dividend percentage}(382,000 shares –4,000 shares+2,000 shares)× 5%=380,000 shares× 5%= 19,000 shares (1)

Compute amount of retained earnings distributable for stock dividends (Refer to Equation (1) for stock dividend shares value).

Retained earnings = Stock dividend shares × Market value per share= 19,000 shares × $42= $798,000 (2)   

Compute the amount of stock dividends to be distributed (Refer to Equation (1) for stock dividend shares value).

Stock dividends to be distributed value} = Stock dividend shares × Par value of stock= 19,000 shares × $1= $19,000 (3)

Compute additional paid-in capital (Refer to Equations (2) and (3) for retained earnings and stock dividends to be distributed value).

Additional paid-in capital = Retained earnings –Stock dividends to be distributed= $798,000 – $19,000= $779,000

Transaction on June 30:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2018
June30Stock Dividends to Be Distributed19,000
Common Stock19,000
(Record distribution of stock dividends)

Table (6)

Description:

  • Stock Dividends to Be Distributed is a stockholders’ equity account. Since common stock is issued due to declaration of stock dividends, the value is transferred to common stock, the equity value is decreased. A decrease in equity is debited.
  • Common Stock is a stockholders’ equity account. Since common stock is issued, equity value is increased. An increase in equity is credited.

Note: Refer to Equation (3) for value and computation of stock dividends distributable value.

Transaction on August 4:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2018
August4Cash 22,200
Additional Paid-in Capital–Treasury Stock1,800
Treasury Stock24,000
 (Record sale of treasury stock)

Table (7)

Description:

  • Cash is an asset account. The amount is increased because cash is received on sale of reacquired shares, and an increase in assets should be debited.
  • Additional Paid-In Capital–Treasury Stock is a stockholders’ equity account. Since treasury stock is sold for a price less than its purchase price, equity value is decreased. A decrease in equity is debited.
  • Treasury Stock is a stockholders’ equity account. Since reacquired shares of treasury stock are sold, the value of treasury stock is reduced. The treasury stock which was debited previously, is now credited to reduce its balance.

Working Notes:

Compute cash received.

Cash received= Number of shares × Selling price= 600 shares × $37= $22,200

Compute treasury stock value.

Treasury stock = Number of shares × Purchase price= 600 shares × $40= $24,000

Compute additional paid-in capital value.

Paid-in capital value= Number of shares × (Selling price–Purchase price)= 600 shares × ($37–$40)= 600 shares × $(3)= $(1,800)

Transaction on December 31 (closing net income):

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2018
December31Income Summary1,928,000
Retained Earnings1,928,000
(Record net income being closed to Retained Earnings account)

Table (8)

Description:

  • Income Summary is a temporary account used to close the net balance of revenue and expense accounts. Since the net income is closed to Retained Earnings account, the Retained Earnings is credited and Income Summary account is debited.
  • Retained Earnings is a stockholders’ equity account. Since revenues are transferred to the account, the value increased, and an increase in equity is credited.

Transaction on December 31 (closing dividends):

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2018
December31Income Summary381,000
Retained Earnings381,000
(Record dividends being closed to Retained Earnings account)

Table (9)

Description:

  • Retained Earnings is a stockholders’ equity account. Since dividends are transferred to the account, the value decreased, and a decrease in equity is debited.
  • Income Summary is a temporary account used to close the net balance of revenue and expense accounts. Since the dividends (expense) are closed to Retained Earnings account, the Retained Earnings is debited and Income Summary account is credited.

b.

To determine

Prepare the stockholders’ equity section of the balance sheet for Incorporation TS at December 31, 2018.

b.

Expert Solution
Check Mark

Explanation of Solution

Stockholders’ equity section: The section of balance sheet which reports the changes in stock, paid-in capital, retained earnings, and treasury stock, during the year is referred to as stockholders’ equity section.

Prepare the stockholders’ equity section of the balance sheet for Incorporation TS at December 31, 2018.

Financial Accounting, Chapter 12, Problem 6AP

Table (10)

Working Notes:

Compute the number of shares issued as at December 31, 2018.

Number of shares issued at December 31, 2018} = {Number of shares at January 1, 2018–Number of shares distributed as stock dividend on June 1+}=(382,000+19,000)shares= 401,000 shares

Compute number of shares in treasury stock.

Number of shares in treasury stock at December 31, 2018} = {Number of shares purchased as treasury stock on April 12–Number of shares reissued from treasury stock on May 9–Number of shares reissued from treasury stock on August 4}=(6,000–4,000–600)shares= 1,400 shares

Refer to transaction on June 1 for value of additional paid-in capital from stock dividend.

Compute additional paid-in capital from treasury stock.

Additional paid-in capital from treasury stock} = {Additional paid-in capital from treasury stock from transaction on May 9– Additional paid-in capital from treasury stock from transaction on August 4}= $16,000–$1,800= $14,200

Compute amount of retained earnings (Refer to the working notes of transactions on February 15 and June 1 for value of cash and stock dividends).

Incorporation TS
Statement of Retained Earnings
For the Year Ended December 31, 2018
Retained earnings, January 1, 2018$2,704,600
Add: Net income1,928,000
4,632,600
Less:
 Cash dividends$382,000
 Stock dividends798,000(1,180,000)
Retained earnings, December 31, 2018$3,452,600

Table (11)

Conclusion

Thus, the total stockholders’ equity of Incorporation TS is $8,792,800.

c.

To determine

Compute the amount of legal cash dividend per share according to the given condition.

c.

Expert Solution
Check Mark

Explanation of Solution

Cash dividends: This is the amount of cash distributed to stockholders by a company out of its earnings, according to their proportion of shares held in the company stock.

Compute the amount of legal cash dividend per share of Incorporation TS in 2018.

ParticularsAmount ($)
Retained earnings, December 31, 2018$3,452,600
Less: Restriction of retained earnings for treasury stock56,000
Unrestricted retained earnings3,396,600
Number of outstanding common shares÷  401,000 shares
Maximum legal cash dividend per common share$8.50

Table (12)

Note: Refer to working notes of Part (b) for the value of retained earnings ending balance, and number of outstanding shares at the end of 2018.

Conclusion

Thus, the legal cash dividend per common share of Incorporation TS for the year ended December 31, 2018 is $8.50.

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Chapter 12 Solutions

Financial Accounting

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