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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

(Preferred Dividends) Matt Schmidt Company鈥檚 ledger shows the following balances on December 31, 2017.

7% Preferred stock鈥擻(10 par value, outstanding 20,000 shares \) 200,000

Common stock鈥擻(100 par value, outstanding 30,000 shares 3,000,000

Retained earnings 630,000

Instructions

Assuming that the directors decide to declare total dividends in the amount of \)366,000, determine how much each class of stock should receive under each of the conditions stated below. One year鈥檚 dividends are in arrears on the preferred stock.

  1. The preferred stock is cumulative and fully participating.
  2. The preferred stock is noncumulative and nonparticipating.
  3. The preferred stock is noncumulative and is participating in distributions in excess of a 10% dividend rate on the common stock.

Seles Corporation鈥檚 charter authorized issuance of 100,000 shares of \(10 par value common stock and 50,000 shares of \)50 preferred stock. The following transactions involving the issuance of shares of stock were completed. Each transaction is independent of the others.

  1. Issued a \(10,000, 9% bond payable at par and gave as a bonus one share of preferred stock, which at that time was selling for \)106 a share.
  2. Issued 500 shares of common stock for equipment. The equipment had been appraised at \(7,100; the seller鈥檚 book value was \)6,200. The most recent market price of the common stock is \(16 a share.
  3. Issued 375 shares of common and 100 shares of preferred for a lump sum amounting to \)10,800. The common had been selling at \(14 and the preferred at \)65.
  4. Issued 200 shares of common and 50 shares of preferred for equipment. The common had a fair value of \(16 per share; the equipment has a fair value of \)6,500.

Instructions

Record the transactions listed above in journal entry form.

(Dividends and Stockholders鈥� Equity Section) Anne Cleves Company reported the following amounts in the stockholders鈥� equity section of its December 31, 2016, balance sheet.

Preferred stock, 10%, \(100 par (10,000 shares authorized, 2,000 shares issued)

\)200,000

Common stock, \(5 par (100,000 shares authorized, 20,000 shares issued)

100,000

Additional paid-in capital

125,000

Retained earnings

450,000

Total

\)875,000

During 2017, Cleves took part in the following transactions concerning stockholders鈥� equity.

  1. Paid the annual 2016 \(10 per share dividend on preferred stock and a \)2 per share dividend on common stock. These dividends had been declared on December 31, 2016.
  2. Purchased 1,700 shares of its own outstanding common stock for \(40 per share. Cleves uses the cost method.
  3. Reissued 700 treasury shares for land valued at \)30,000.
  4. Issued 500 shares of preferred stock at \(105 per share.
  5. Declared a 10% stock dividend on the outstanding common stock when the stock is selling for \)45 per share.
  6. Issued the stock dividend.
  7. Declared the annual 2017 \(10 per share dividend on preferred stock and the \)2 per share dividend on common stock. These dividends are payable in 2018.

Instructions

  1. Prepare journal entries to record the transactions described above.
  2. Prepare the December 31, 2017, stockholders鈥� equity section. Assume 2017 net income was $330,000.

Discuss the propriety of showing:

  1. Treasury stock as an asset.
  2. 鈥淕ain鈥� or 鈥渓oss鈥� on sale of treasury stock as additions to or deductions from income.
  3. Dividends received on treasury stock as income.

(Analysis of Equity Data and Equity Section Preparation) For a recent 2-year period, the balance sheet of Santana Dotson Company showed the following stockholders鈥� equity data on December 31 (in millions).

2017

2016

Additional paid-in capital

\( 931

\) 817

Common stock

545

540

Retained earnings

7,167

5,226

Treasury stock

1,564

918

Total stockholders鈥� equity

\(7,079

\)5,665

Common stock shares issued

218

216

Common stock shares authorized

500

500

Treasury stock shares

34

27

Instructions

  1. Answer the following questions
  2. What is the par value of the common stock?
  3. What is the cost per share of treasury stock on December 31, 2017, and on December 31, 2016?
  4. Prepare the stockholders鈥� equity section on December 31, 2017.
See all solutions

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