Company A reported the following amounts of contributed capital in the stockhold

Question

Company A reported the following amounts of contributed capital in the stockholders' equity accounts as of January 1, 2014:

Contributed capital:

Common stock, par $5, authorized 50,000 shares;

Issued & outstanding 30,000 shares $150,000

Capital in excess of par 100,000

Prepare the journal entries for the following transactions below as of December 31, 2014. (all the entries appear in chronological order):

a. Company sold an additional 10,000 shares of common stock at a market price of $8 per share.

b. Company issued 1,000 issues of 7% Preferred Stock for $100 per share

c. Company purchased 4,000 of its own shares at $7 per share

d. Company reporting an income of $180,000

e. Company declared a cash dividend on the preferred stock

f. Company declared a stock dividend on 10% of the common stock when the market price was $9 per share

Explanation / Answer

a. Premium = $8 - $5 = $3. Total premium = 10,000 shares*$3 = $30,000. Total amount received = 10,000 shares*$8 = $80,000.

Journal entry:

Cash (Dr) $80,000

Common Stock (Cr) $50,000

Additional paid in capital (Cr) $30,000

b. Total amount = 1,000 shares*$100 = $100,000. The stocks are issued at par and hence there is no premium.

Entry:

Cash (Dr) $100,000

Preferred stock (Cr) $100,000

c. This is treasury stock. Par value = $5. Purchase price = $7. Number of shares = 4,000. Cost = 4,000 shares*7 = $28,000

Using the cost method for accounting treasury stock, entry will be:

Treasury stock (Dr) $28,000

Cash (Cr) $28,000

d. Net Income = 180,000. Journal entry will be:

Profit and loss account (Income account) (Dr) $180,000

Contributed capital (Cr) $180,000

e. Dividend on preferred stock = 7% of 100*(1,000 shares*$100) = $7,000

Entry:

Dividends (Dr) $7,000

Dividends payable (Cr) $7,000

Dividends payable will stand as a liability till the time dividends are actually paid.

f. Number of common stock = 30,000 (original)+10,000 (additional issue) - 4,000 (buyback) = 36,000 shares

amount = number of shares outstanding*share's market price*dividend percentage

= 36,000 shares*$9*10% = $32,400

Entry:

Retained earnings (Dr) $32,400

Dividends payable (Cr) $32,400

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