Chapter 15: Q18E. (page 816)

(Dividends and Stockholders’ Equity Section) Anne Cleves Company reported the following amounts in the stockholders’ 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’ equity.
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.
Purchased 1,700 shares of its own outstanding common stock for $40 per share. Cleves uses the cost method.
Reissued 700 treasury shares for land valued at $30,000.
Issued 500 shares of preferred stock at $105 per share.
Declared a 10% stock dividend on the outstanding common stock when the stock is selling for $45 per share.
Issued the stock dividend.
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
Prepare journal entries to record the transactions described above.
Prepare the December 31, 2017, stockholders’ equity section. Assume 2017 net income was $330,000.

Short Answer

Expert verified

Total Stockholders’ Equity section is $1,152,700,and the total debit and credit side of the journal is $371,800

Step by step solution

Meaning of Stockholders’ Equity

Shareholder's equity is the difference between a company's assets and liabilities, representing the remaining value if all assets were liquidated and outstanding obligations were settled.

Preparing Journal Entries

S.no.	Particular	Debit ($)	Credit ($)
(a) 1	Dividend Payable- Preferred	20,000
	Dividend Payable-Common	40,000
	Cash		60,000
	To record the issue of dividend

Calculation of Dividend Payable-Preferred

$\begin{array}{rcl} Dividend & = & Issue share \times Per unti share \\ = & 2, 000 \times $ 10 \\ = & $ 20, 000 \end{array}$

Calculation of Dividend Payable-Common

$\begin{array}{rcl} Dividend & = & Issue share \times Per unit share \\ = & 20, 000 \times $ 2 \\ = & $ 40, 000 \end{array}$

S.no.	Particular	Debit ($)	Credit ($)
(a) 2	Treasury Stock	68,000
	Cash		68,000
	To record purchase of the share

Calculation of Total Amount of Cash

$\begin{array}{rcl} Cash amount & = & Share purchased \times Per unti cost \\ = & 1, 700 \times $ 40 \\ = & $ 68, 000 \end{array}$

S.no.	Particular	Debit ($)	Credit ($)
(a) 3	Land	30,000
	Treasury Stock		28,000
	Paid-in Capital from Treasury stock		2,000
	To record the reissued treasury stock

Calculation of Treasury Stock

$\begin{array}{rcl} Amount of Treasury stock & = & Reissued shares \times Cost per unit \\ = & 700 \times $ 40 \\ = & $ 28, 000 \end{array}$

S.no.	Particular	Debit ($)	Credit ($)
(a) 4	Cash	52,500
	Preferred Stock		50,000
	Paid-in Capital in Excess of Par- Preferred Stock		2,500
	To record the issue of preferred stock

Calculation of Preferred Share

$\begin{array}{rcl} Preferred stock amount & = & Shares \times Per unit price \\ = & 500 \times $ 100 \\ = & $ 50, 000 \end{array}$

S.no.	Particular	Debit ($)	Credit ($)
(a) 5	Retained Earnings	85,500
	Common Stock Dividend Distributable		9,500
	Paid-in Capital in Excess of Par- Common Stock		76,000
	To record the issue of preferred stock

Calculation of Retained Earnings:

localid="1648195983272" $\begin{array}{rcl} Total retained earnings share & = & Total Stock - Outstanding common stock + Treasury shares \\ = & 20, 000 - 1, 700 + 700 \\ = & 19, 000 \end{array}$

$\begin{array}{rcl} Retained earnings share & = & Retained earnings \times Stock dividend rate \\ = & 19, 000 \times 10 % \\ = & 1, 900 \end{array}$

$\begin{array}{rcl} Total value of retained earnings & = & Retained earnings share \times Per share ost \\ = & 1, 900 \times $ 45 \\ = & $ 85, 000 \end{array}$

S.no.	Particular	Debit $	Credit $
(a) 6	Common Stock Dividend Distributable	9,500
	Common Stock		9,500
	To record the issue of dividends.

(a) 7	Retained Earnings	66,800
	Dividends Payable-Preferred		25,000
	Dividends Payable -common		41,800
	To record the declaration of dividend.

Calculation of Total amount of Dividend Payable-Common is given as follows:

$\begin{array}{rcl} Total dividend payable & = & Total dividend \times Cost per share \\ = & (19, 000 + 1, 900) \times $ 2 \\ = & 20, 900 \times $ 2 \\ = & $ 41, 800 \end{array}$

Preparing Stockholders’ Equity section

ANNE CLEVES COMPANY Stockholders’ Equity December 31, 2014
Capital Stock Preferred stock,10%, $100par,10,000 shares authorized,2500 shares issued and outstanding	$250,000
Common Stock, $5par,100,000 shares Authorized 21,900 shares issued,20,900 shares outstanding	109,500
Total Capital Stock	359,500
Additional paid-in capital	205,500
Total paid-in capital	565,000
Retained Earnings	627,700
Total paid-in capital and retained earnings Less: Cost of treasury stock (1,000 shares common)	1,192,700 40,000
Total stockholders’ Equity	$1,152,700

Working notes:

Computation of Preferred stock is given as follows:

$\begin{array}{rcl} Preferred stock & = & Ossied share \times Par value \\ = & 2, 500 \times 100 \\ = & $ 250, 000 \end{array}$

Computation of Common Stock is given as follows:

localid="1648196365864" $\begin{array}{rcl} Common Stock & = & Authorized share \times Par value \\ = & 21, 900 \times $ 5 \\ = & $ 109, 500 \end{array}$

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Short Answer

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Meaning of Stockholders’ Equity

Preparing Journal Entries

Preparing Stockholders’ Equity section

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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