Peeler Company was incorporated as a new business on January 1, 2010. The corpor

Question

Peeler Company was incorporated as a new business on January 1, 2010. The corporate
charter approved on that date authorized the issuance of 1,000 shares of $100 par, 7%
cumulative, nonparticipating preferred stock and 10,000 shares of $5 par common stock
On January 10, Peeler issued for cash 500 shares of preferred stock at $120 per share
and 4,000 shares of common stock at $80 per share. On January 20, it issued 1000
shares of common stock to acquire a building site at a time when the stock was
selling for $70 per share.

During 2010, Peeler established an employee benefit plan and acquired 500 shares
of common stock at $60 per share as treasury stock for that purpose. Later in 2010, it
resold 100 shares of the stock at $65 per share.

On December 31, 2010, Peeler determined its net income for the year to be $40,000.
The firm declared the annual cash dividend to preferred stockholders and a cash dividend
of $5 per share to the common stockholders. The dividends will be paid in 2011.

Required

Develop a statement of stockholders’ equity for Peeler Company for 2010. The statement
should start with the beginning balance of each stockholders’ equity account and explain
the changes that occurred in each account to arrive at the 2010 ending balances.

Explanation / Answer

                                          Preferred    Common                 Paid-in         Treasury            Retained
                                             Stock                   Stock                    Capital          Stock                 Earnings

Balance, January 1                $ 0                        $ 0 $ 0       $ 0    $ 0
Sale of preferred stock        50,000 10,000
Sale of common stock 20,000                    300,000
Issuance of common
      stock for building site 5,000                    65,000
Purchase of treasury
      stock    (30,000)
Sale of treasury stock                                                                       500 6,000
Net income                                                                                                                                       40,000
Cash dividends—
       Preferred (3,500)
Cash dividends—
       Common (23,000)
Balance, December 31    $50,000               $25,000                 $375,500           $(24,000) $ 13,500

Explanations:
1/10 Preferred stock: 500 × $100 par = $50,000 increase
Additional paid-in capital: 500 × ($120 – $100) = $10,000 increase

1/10 Common stock: 4,000 × $5 = $20,000 increase
Additional paid-in capital: 4,000 × ($80 – $5) = $300,000 increase

1/20 Common stock: 1,000 × $5 par = $5,000 increase
Additional paid-in capital: 1,000 × ($70 – $5) = $65,000 increase

Acquisition of treasury stock:
Treasury stock: 500 × $60 = $30,000 decrease

Resale of treasury stock:
Treasury stock: 100 × $60 = $6,000 increase
Additional paid-in capital: 100 × ($65 – $60) = $500 increase

12/31 Net income:
      Retained earnings: $40,000 increase

12/31 Cash dividends:
      Preferred stock:
           (500 × $100 × 7%) = $3,500 decrease in Retained Earnings
Common stock:
    4,600 outstanding × $5 per share = $23,000 decrease in Retained Earnings

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