ET-Z Reporting Stockholders Equlty and Determining DIidend Policy LO IEZ, LO 11-
ID: 2525522 • Letter: E
Question
ET-Z Reporting Stockholders Equlty and Determining DIidend Policy LO IEZ, LO 11-3] The following information applies to the questions displayed below Incentlve Corporation was authorized to Issue 12,000 shares of common stock, each with a $2 par value. During its first year, the following selected transactions were completed: a. Issued 6,100 shares of common stock for cash at $21 per share. b. Issued 2,100 shares of common stock for cash at $24 per share. References E11-2 Reporting Stockholders Equity and Determining Dividend Policy [LO 11-2, LO 11-3 Section BreakExplanation / Answer
Solution: (1)
Assets
=
Liabilities
+
Stockholders’ Equity
a.
Cash
(6,100X $21)
$128,100
=
NA
0
+
Common Stock
(6,100X $2)
$12,200
+
Additional paid in capital
[6,100X $(21-2)]
$115,900
b.
Cash
(2,100X $24)
$50,400
=
NA
0
+
Common Stock
(2,100X $2)
$4,200
+
Additional paid in capital
[2,100X $(24-2)]
$46,200
Solution: (2)
Journal Entries
No
Date
General Journal
Debit ($)
Credit ($)
a.
Cash
128,100
Common Stock (6,100X $2)
12,200
Additional paid in capital
[6,100X $(21-2)]
115,900
b.
Cash
50,400
Common Stock (2,100X $2)
4,200
Additional paid in capital
[2,100X $(24-2)]
46,200
Solution: (3)
INCENTIVE CORPORATION
BALANCE SHEET (PARTIAL)
AT DECEMBER 31
Stockholders’ Equity
Contributed Capital:
Common Stock ($12,200 + $4,200)
$ 16,400
Additional paid in capital ($115,900 + $46,200)
$ 162,100
Total Contributed Capital
$ 178,500
Retained Earnings (Given)
$ 200
Total Stockholders’ Equity
$ 178,700
Solution: (4) Incentive Corporation can not declare and pay dividends because of insufficient funds in retained earnings.
Reason: Incentive Corporation has a balance of only $200 in Retained Earnings, which, generally, would prohibit the payment of dividends (because state laws often restrict dividends to the balance in Retained Earnings).So, in the absence of significant earnings, dividends should not be paid.
Assets
=
Liabilities
+
Stockholders’ Equity
a.
Cash
(6,100X $21)
$128,100
=
NA
0
+
Common Stock
(6,100X $2)
$12,200
+
Additional paid in capital
[6,100X $(21-2)]
$115,900
b.
Cash
(2,100X $24)
$50,400
=
NA
0
+
Common Stock
(2,100X $2)
$4,200
+
Additional paid in capital
[2,100X $(24-2)]
$46,200
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