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Chapter 15: 8E (page 813)

Pistons Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first month, he made the following entries for the corporation鈥檚 capital stock.

S.no.

Particular

Folio

Debit \(

Credit \)

May 2

Cash

192,000

Capital Stock

192,000

(Issued 12,000 shares of \(5 par value common stock at \)16 per share)

May 10

Cash

600,000

Capital Stock

600,000

(Issued 10,000 shares of \(30 par value preferred stock at \)60 per share)

May 15

Capital Stock

15,000

Cash

15,000

(Purchased 1,000 shares of common stock for the treasury at \(15 per share)

May 31

Cash

8,500

Capital Stock

5,000

Gain on Sale of Stock

3,500

(Sold 500 shares of treasury stock at \)17 per share)

Instructions

On the basis of the explanation for each entry, prepare the entries that should have been made for the capital stock transactions.

Short Answer

Expert verified

The total cumulative dividend is $240,000.

The total paid-in capital in excess of par is $70,000.

Step by step solution

01

Meaning of Capital stock

The shares of ownership issued by a corporation are capital stock. The sum received by the corporation when its shares of capital stock were issued is represented as paid-in capital on the balance sheet in the shareholders' equity section.

02

Preparing the entries that should have been made for the capital transaction

(a) The Cumulative dividend is disclosed in a note to the stockholders鈥� equity section; it is not reported as a liability.

S.no.

Particular

Folio

Debit $

Credit $

(b)

Preferred stock A/c.

400,000

Common Stock A/c.

280,000

Paid-in Capital in excess of par common

Stock A/c.

120,000

To record the issue of stock

(c)Paid-in capital

Preferred stock, ($100 par, 8% 10,000 shares issued)

$1,000,000

Paid-in Capital in excess of par (10,000*$7)

70,000

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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.

The books of Conchita Corporation carried the following account balances as of December 31, 2017.

Cash \( 195,000

Preferred Stock (6% cumulative, nonparticipating, \)50 par) 300,000

Common Stock (no-par value, 300,000 shares issued) 1,500,000

Paid-in Capital in Excess of Par鈥擯referred Stock 150,000

Treasury Stock (common 2,800 shares at cost) 33,600

Retained Earnings 105,000

The company decided not to pay any dividends in 2017.

The board of directors, at their annual meeting on December 21, 2018, declared the following: 鈥淭he current year dividends shall be 6% on the preferred and \(.30 per share on the common. The dividends in arrears shall be paid by issuing 1,500 shares of treasury stock.鈥� At the date of declaration, the preferred is selling at \)80 per share, and the common at \(12 per share. Net income for 2018 is estimated at \)77,000.

Instructions

a) Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously.

b) Could Conchita Corporation give the preferred stockholders 2 years鈥� dividends and common stockholders a 30 cents per share dividend, all in cash?

(Stock Split and Stock Dividend) The common stock of Alexander Hamilton Inc. is currently selling at \(120 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is \)10; book value is $70 per share. Nine million shares are issued and outstanding.

Instructions

Prepare the necessary journal entries assuming the following

  1. The board votes a 2-for-1 stock split.
  2. The board votes a 100% stock dividend.
  3. Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

Indicate how each of the following accounts should be classified in the Equity section.

  1. Share Capital鈥擮rdinary.
  2. (b) Retained Earnings.
  3. Share Premium鈥擮rdinary.
  4. Treasury Shares.
  5. Share Premium鈥擳reasury
  6. Share Capital鈥擯reference
  7. Accumulated Other Comprehensive Income.

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.
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