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Chapter 15: 7E (page 813)

Joe Dumars Company has outstanding 40,000 shares of \(5 par common stock, which had been issued at \)30 per share. Joe Dumars then entered into the following transactions.

  1. Purchased 5,000 treasury shares at \(45 per share.
  2. Resold 2,000 of the treasury shares at \)49 per share.
  3. Resold 500 of the treasury shares at $40 per share.

Instructions

Use the following code to indicate the effect each of the three transactions has on the financial statement categories listed in the table below, assuming Joe Dumars Company uses the cost method (I = Increase; D = Decrease; NE = No effect).

#

Asset

Liabilities

Stockholders鈥� Equity

Paid-in Capital

Retained

Earnings

Net Income

1

2

3

Short Answer

Expert verified

Purchasing treasury shares will decrease asset and stockholders鈥� accounts. Reselling treasury share will result in increased asset, stockholders鈥� equity, and paid-in capital account. Liabilities retained earnings, and net income will remain unaffected while preparing the transactions.

Step by step solution

01

Meaning of Treasury Share

As the name implies, 鈥渢reasury stock鈥� is the stock issued by the company. When establishing a company, the company issues its own stock. The investor underwrites the shares and provides the company with funds.

02

Indicating the effect of each transaction

#

Asset

Liabilities

Stockholders鈥� Equity

Paid-in Capital

Retained

Earnings

Net Income

1

D

NE

D

NE

NE

NE

2

I

NE

I

I

NE

NE

3

I

NE

I

D

NE

NE

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Most popular questions from this chapter

Hatch Company has two classes of capital stock outstanding: 8%, \(20 par preferred and \)5 par common. At December 31, 2017, the following accounts were included in stockholders鈥� equity.

Preferred Stock, 150,000 shares \( 3,000,000

Common Stock, 2,000,000 shares 10,000,000

Paid-in Capital in Excess of Par鈥擯referred Stock 200,000

Paid-in Capital in Excess of Par鈥擟ommon Stock 27,000,000

Retained Earnings 4,500,000

The following transactions affected stockholders鈥� equity during 2018.

Jan.1 30,000 shares of preferred stock issued at \)22 per share.

Feb.1 50,000 shares of common stock issued at \(20 per share.

June 1 2-for-1 stock split (par value reduced to \)2.50).

July 1 30,000 shares of common treasury stock purchased at \(10 per

share. Hatch uses the cost method.

Sept.15 10,000 shares of treasury stock reissued at \)11 per share.

Dec.31 The preferred dividend is declared, and a common dividend of 50垄

per share is declared.

Dec. 31 Net income is $2,100,000.

Instructions

Prepare the stockholders鈥� equity section for Hatch Company at December 31, 2018. Show all supporting computations.

(Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders鈥� equity.

  1. Recorded accrued interest earned on a note receivable.
  2. Declared a cash dividend.
  3. Declared and distributed a stock split.
  4. Approved a retained earnings restriction.
  5. Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance.
  6. Paid the cash dividend declared in item 2 above.
  7. Recorded accrued interest expense on a note payable.
  8. Declared a stock dividend.
  9. Distributed the stock dividend declared in item 8.

Instructions

In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code: I = Increase, D = Decrease, NE = No effect.

Item

Asset

Liabilities

Stockholders鈥� Equity

Paid-in Capital

Retained

Earnings

Net Income

Statements of Financial Accounting Concepts set forth financial accounting and reporting objectives and fundamentals that will be used by the Financial Accounting Standards Board in developing standards. Concepts Statement No. 6 defines various elements of financial statements.

Instructions

Answer the following questions based on SFAC No. 6.

  1. Define and discuss the term 鈥渆quity.鈥�
  2. What transactions or events change owners鈥� equity?
  3. Define 鈥渋nvestments by owners鈥� and provide examples of this type of transaction. What financial statement element other than equity is typically affected by owner investments?
  4. Define 鈥渄istributions to owners鈥� and provide examples of this type of transaction. What financial statement element other than equity is typically affected by distributions?
  5. What are examples of changes within owners鈥� equity that do not change the total amount of owners鈥� equity?

(Recording the Issuances of Common Stock) During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock.

Jan. 10 Issued 80,000 shares for cash at \(6 per share.

Mar. 1 Issued 5,000 shares to attorneys in payment of a bill for

\)35,000 for services rendered in helping the company to

incorporate.

July 1 Issued 30,000 shares for cash at \(8 per share.

Sept. 1 Issued 60,000 shares for cash at \)10 per share.

Instructions

  1. Prepare the journal entries for these transactions, assuming that the common stock has a par value of \(5 per share.
  2. Prepare the journal entries for these transactions, assuming that the common stock is no-par with a stated value of \)3 per share.

(Preferred Dividends) The outstanding capital stock of Edna Millay Corporation consists of 2,000 shares of \(100 par value, 8% preferred, and 5,000 shares of \)50 par value common.

Instructions

Assuming that the company has retained earnings of $90,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.

  1. The preferred stock is noncumulative and nonparticipating.
  2. The preferred stock is cumulative and nonparticipating.
  3. The preferred stock is cumulative and participating. (Round dividend rate percentages to four decimal places.)
See all solutions

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