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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

(Stockholders鈥� Equity Section) Bruno Corporation鈥檚 post-closing trial balance at December 31, 2017, is shown as follows.

BRUNO CORPORATION

POST-CLOSING TRIAL BALANCE

DECEMBER 31, 2017

Dr.

Cr.

Accounts payable

\( 310,000

Accounts receivable

\) 480,000

Accumulated depreciation鈥攂uildings

185,000

Additional paid-in capital in excess

of par鈥攃ommon

1,300,000

From treasury stock

160,000

Allowance for doubtful accounts

30,000

Bonds payable

300,000

Buildings

1,450,000

Cash

190,000

Common stock (\(1 par)

200,000

Dividends payable (preferred stock鈥攃ash)

4,000

Inventory

560,000

Land

400,000

Preferred stock (\)50 par)

500,000

Prepaid expenses

40,000

Retained earnings

301,000

Treasury stock (common at cost)

170,000

Totals

\(3,290,000

\)3,290,000

At December 31, 2017, Bruno had the following number of common and preferred shares.

Common

Preferred

Authorized

600,000

60,000

Issued

200,000

10,000

Outstanding

190,000

10,000

The dividends on preferred stock are \(4 cumulative. In addition, the preferred stock has a preference in liquidation of \)50 per share.

Instructions

Prepare the stockholders鈥� equity section of Bruno鈥檚 balance sheet at December 31, 2017.

(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.)

Stock splits and stock dividends may be used by a corporation to change the number of shares of its stock outstanding.

  1. What is meant by a stock split effected in the form of a dividend?
  2. From an accounting viewpoint, explain how the stock split effected in the form of a dividend differs from an ordinary stock dividend.
  3. How should a stock dividend that has been declared but not yet issued be classified in a balance sheet? Why?

(Computation of Book Value per Share) Morgan Sondgeroth Inc. began operations in January 2015 and reported the following results for each of its 3 years of operations.

2015 \(260,000net loss 2016 \)40,000 net loss 2017 \(800,000 net income

At December 31, 2017, Morgan Sondgeroth Inc. capital accounts were as follows.

8% cumulative preferred stock, par value \)100;

authorized, issued, and outstanding 5,000 shares \(500,000

Common stock, par value \)1.00; authorized 1,000,000 shares;

issued and outstanding 750,000 shares \(750,000

Morgan Sondgeroth Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Sondgeroth began operations. The state law permits dividends only from retained earnings.

Instructions

  1. Compute the book value of the common stock on December 31, 2017.
  2. Compute the book value of the common stock on December 31, 2017, assuming that the preferred stock has a liquidating value of \)106 per share.

(Computation of Retained Earnings) The following information has been taken from the ledger accounts of Isaac Stern Corporation.

Total income since incorporation $317,000

Cash dividends paid 60,000

Total value of stock dividends distributed 30,000

Gains on treasury stock transactions 18,000

Unamortized discount on bonds payable 32,000

Instructions

Determine the current balance of retained earnings.
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