Washington Company has the following stockholders’ equity accounts at December 31, 2017.

Common Stock (\(100 par value, authorized 8,000 shares) \)480,000

Retained Earnings 294,000

Instructions

a. Prepare entries in journal form to record the following transactions, which took place during 2018.

1. 280 shares of outstanding stock were purchased at \(97 per share. (These are to be accounted for using the cost method.)

2. A \)20 per share cash dividend was declared.

3. The dividend declared in (2) above was paid.

4. The treasury shares purchased in (1) above were resold at \(102 per share.

5. 500 shares of outstanding stock were purchased at \)105 per share.

6. 350 of the shares purchased in (5) above were resold at \(96 per share.

b.Prepare the stockholders’ equity section of Washington Company’s balance sheet after giving effect to these transactions, assuming that the net income for 2018 was \)94,000. State law requires restriction of retained earnings for the amount of treasury stock.

Step by step solution

01

Meaning of Shareholders’ Equity

Shareholders' equity represents a company's total net worth which primarily includes capital stock, additional paid-in capital, and retained earnings. As the value of shareholders' equity increases, the net worth of the company also increases.

02

Preparing Journal Entry of the transaction (1)

Date	Particular	Debit ($)	Credit ($)
	Treasury Stock	27,160
	Cash		27,160

Working Notes:

$\begin{array}{rcl}\mathrm{Treasury}\mathrm{stock}& =& \mathrm{Shares}\times \mathrm{per}\mathrm{value}\mathrm{share}\\ & =& 280\times \$97\\ & =& \$27,160\end{array}$

03

Preparing Journal Entry of the transaction (2)

Date	Particular	Debit ($)	Credit ($)
	Retained Earnings	90,400
	Dividends Payable		90,400

Working Notes:

$\begin{array}{rcl}\mathrm{Dividend}\mathrm{payable}& =& \left[\left(\mathrm{Common}\mathrm{stock}-\mathrm{Outstanding}\mathrm{shares}\right)\times \mathrm{per}\mathrm{share}\mathrm{value}\right]\\ & =& \left[\left(4,800-280\right)\times \$20\right]\\ & =& 90,400\end{array}$

04

Preparing Journal Entry of the transaction (3)

Date	Particular	Debit ($)	Credit ($)
	Dividends Payable	90,400
	Cash		90,400

05

Preparing Journal Entry of the transaction (4)

Date	Particular	Debit ($)	Credit ($)
	Cash	28,560
	Treasury Stock		27,160
	Paid-in Capital from Treasury Stock		1,400

Working Notes:

$\begin{array}{rcl}\mathrm{Paid}-\mathrm{in}\mathrm{capital}\mathrm{from}\mathrm{treasury}\mathrm{stock}& =& \mathrm{Shares}\times \mathrm{per}\mathrm{value}\mathrm{of}\mathrm{shares}\\ & =& 280\times \$5\\ & =& \$1,400\end{array}$

06

Preparing Journal Entry of the transaction (5)

Date	Particular	Debit ($)	Credit ($)
	Treasury Stock	52,500
	Cash		52,500

Working Notes:

$\begin{array}{rcl}\mathrm{Treasury}\mathrm{stock}& =& \mathrm{Shares}\times \mathrm{per}\mathrm{value}\mathrm{of}\mathrm{share}\\ & =& 350\times \$105\\ & =& 52,500\end{array}$

07

Preparing Journal Entry of the transaction (6)

Date	Particular	Debit ($)	Credit ($)
	Cash	33,600
	Paid-in Capital from Retained Stock	1,400
	Retained Earnings	1,750
	Treasury Stocks		36,750

Working Notes:

$\begin{array}{rcl}\mathrm{Cash}\mathrm{amount}& =& \mathrm{Total}\mathrm{shares}\times \mathrm{per}\mathrm{value}\mathrm{of}\mathrm{shares}\\ & =& 350\times \$96\\ & =& \$33,600\\ \mathrm{Treasury}\mathrm{stock}& =& \mathrm{Stock}\times \mathrm{per}\mathrm{value}\mathrm{share}\\ & =& 350\times \$105\\ & =& \$36,750\end{array}$

08

Preparing Stockholders’ Equity (b)

WASHINGTON Company Stockholders’ Equity December 31, 2018
Common Stoc,$100 par value, authorized 8,000 shares; Issued 4,800 shares, 4,650 shares outstanding	$480,000
Retained Earnings (restricted in the amount of $15,750 by the acquisition of treasury stock)	295,850
Total paid-in capital and retained earnings Less: treasury Stock(150 shares)	775,850 15,750
Total stockholders’ equity	$760,100

Working Notes:

$\begin{array}{rcl}\mathrm{Treasury}\mathrm{stock}\mathrm{restriction}\mathrm{amount}& =& \mathrm{Treasury}\mathrm{stock}\mathrm{issued}-\mathrm{Treasury}\mathrm{stock}\mathrm{sales}\\ & =& \$52,500-\$36,750\\ & =& \$15,750\\ \mathrm{Treasury}\mathrm{stock}& =& \mathrm{Reatined}\mathrm{earnings}-\mathrm{Dividend}\mathrm{payable}-\mathrm{Sales}\mathrm{of}\mathrm{retained}\mathrm{earnings}+\mathrm{Net}\mathrm{income}\\ & =& \$294,000-\$90,400-\$1,750+\$94,000\\ & =& \$295,850\end{array}$

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