Owner's Equity
Practice As You Learn
Practice As You Learn
For this subject, you will be asked to record the changes to the owner’s equity accounts:
Owner’s Equity:
Common Stock, $0.01 par value, XXXX shares authorized, XXXX shares issued and XXXX shares outstanding
Preferred Stock, $100 par value, 6%, XXXX shares authorized and XXXX shares issued
Paid in Capital
Retained Earnings
– Treasury Stock
The changes you will record will be:
Common stock: issue shares to shareholders
Preferred stock: issue shares to shareholders
Paid in Capital: issue shares to shareholders, it is the difference in par value and fair market value (cash received)
Retained Earnings: dividends declared and income or loss
Treasury Stock: buy and sell their own shares
General rules to follow when recording owner’s equity transactions:
Always credit: Common Stock, Preferred Stock, Paid in Capital-CS & PS
The amount is = to # shares x par value
Always debit R.E. for dividends declared
Always record treasury stock at the # shares x cost of each share
Always record cash at the # shares x Fair market value of each share
Owner’s Equity – Practice Problem 1 – Issue shares
A corporation was granted a charter at the beginning of the year that authorized 100,000 shares of $0.50 par value common stock and 10,000 shares of $100 par value 5% preferred stock. Record the transactions that occurred during the first year.
a. issued and sold 56,000 common shares at $14 per share
b. issued and sold 8,000 preferred shares at $100 per share
c. issued and sold 20,000 common shares at $22 per share
Check Your Answer
a.
Cash 784,000
Common Stock 28,000
PIC – CS 756,000
b.
Cash 800,000
Preferred Stock 800,000
It is issued at par value and no paid in capital account is necessary
c.
Cash 440,000
Common Stock 10,000
PIC – CS 430,000
Owner’s Equity – Practice Problem 2 – Treasury Stock
A corporation was authorized to issue 500,000 shares of $0.10 par value common stock and 100,000 shares of $50 par value 7% preferred stock. Prior to this year the corporation had issued 200,000 common shares for a total of $2,200,000. On March 1 of this year, the company purchased 10,000 common shares for $12 per share. On August 15th of this year, the corporation sold back to investors 5,000 shares for $18 per share.
Record the transactions related to treasury shares for the current year.
Check Your Answer
3/1 Purchase of TS:
Treasury Stock 120,000
Cash 120,000
8/15 Reissue TS – sell it back out to investors
Cash 90,000
Treasury Stock 60,000 *
PIC – TS 30,000
* Treasury stock goes on and off at original cost: 5,000 shares x $12
Owner’s Equity – Practice Problem 3 – Cash Dividends
A corporation was authorized to issue 1,000,000 shares of $0.01 par value common stock and 100,000 shares of $50 par value 7% preferred stock. Prior to this year the corporation had issued 200,000 common shares for cash of $3,000,000 and 20,000 preferred share for cash of $1,000,000. On February 1st the company declared the stated preferred dividend and a common dividend of $0.50 per share. The record date is March 1st and the payment date is March 18th.
Record all transactions related to the dividend declared.
Check Your Answer
Always debit Retained Earnings for dividends
Record the declaration as a liability and then record the payment
2/1 Declared dividends:
Retained Earnings $100,000
Dividends Payable – CS $100,000
Issued shares of 200,000 x $0.50 per share = $100,000
Retained Earnings $70,000
Dividends Payable – PS $70,000
Shares of 20,000 x par value of $50 x .07 = $70,000
3/1 Record date: No journal entry
3/18 Payment date:
Dividends Payable – CS $100,000
Dividends Payable – PS $ 70,000
Cash $170,000
Owner’s Equity – Practice Problem 4 – Stock Dividends
A corporation was authorized to issue 2,000,000 shares of $1 par value common stock and 100,000 shares of $10 par value 6% preferred stock. Prior to this year the corporation had issued 100,000 common shares for a total of $2,000,000 and 20,000 preferred share for a total of $200,000. The board of directors declared a common stock dividend on February 1st. The record date is March 1st and the payment date is March 18th. The FMV of the common stock was $10 on February 1st and $11.50 on March 18th.
A. Record the common stock dividend given the board declared a 10% dividend.
B. Record the common stock dividend given the board declared a 40% dividend.
C. Given that the board declared a 4:1 split on common stock, what parts of owner’s equity would change?
Check Your Answer
Apply the rules:
Large > 20-25% Debit R.E. for Par value of stock x # shares
Small < 20-25 % Debit R.E. for Fair MV of stock x # shares
Ignore the information on preferred stock, the stock dividend is only on the common stock
a.
February 1 – declared
Retained Earnings $100,000
Dividend Payable $100,000
Previous shares issued x dividend % declared = new shares to issue
100,000 x 10% = 10,000
Small dividend: 10,000 shares x FMV of stock on declared date
$10 = $100,000
March 15 – Payment
Dividend Payable $100,000
Common Stock $10,000 *
PIC – CS $90,000 **
Common stock is always recorded at number of shares (10,000) x par value ($1)
Paid in Capital is recorded for the difference
b.
February 1 – declared
Retained Earnings $40,000
Dividend Payable $40,000
Previous shares issued x dividend % declared = new shares to issue
100,000 x 40% = 40,000
Large dividend: 40,000 shares x Par value ($1) of stock on declared date
March 15 – Payment
Dividend Payable $40,000
Common Stock $40,000 *
Common stock is always recorded at number of shares (40,000) x par value ($1)
There is no difference to record to Paid in Capital
c.
There is no entry for a stock split. Nothing is exchanged. The par value and the number of shares is adjusted. Par value is less, number of shares is more.
Prior to the split, there were 100,000 shares issued with a par value of $1.
4:1 split means to divide the par by 4, so par will become $0.25
4:1 split means to multiply the shares by 4, so total shares issued becomes 400,000
The owner’s equity accounts will not change
The reported amount for common stock is equal to # shares issued x par
Before split: 100,000 x $1 = $100,000 for common stock
After split: 400,000 x $0.25 = $100,000 for common stock
Owner’s Equity – Practice Problem 5 – Record equity transactions and prepare the balance sheet section for owner’s equity
A corporation had 200,000 shares of $1 par common stock issued and outstanding on January 1, of the current year. The common stock was issued at an average price of $7 per share. The corporation had 10,000 shares of preferred stock, $10 par, 5%, outstanding at a total issue price of $100,000. Beginning retained earnings was $645,000. Authorized common stock is 500,000 shares and authorized preferred stock is 25,000 shares. During this year, the following transactions occurred in the following order.
a. The company issued 10,000 common shares at a market price of $22 per share.
b. 12,000 shares were repurchased at a market price of $14 per share.
c. 4,000 shares of treasury stock were reissued at a market price of $20.
d. The company declared and paid a 40% common stock dividend when the market price was $22 per share.
e. Preferred dividends were declared and paid.
f. Income for the current year was $150,000.
Prepare the balance sheet section of owner’s equity at the end of the year.
Check Your Answer
First – You must establish the beginning balances in the equity accounts by recreating the prior stock issuances:
CS issued:
Cash 1,400,000
Common Stock 200,000
Paid In Capital – CS 1,200,000
PS issued Cash 100,000
Preferred Stock 100,000
a.
Then record the current year transactions:
Cash 220,000
Common Stock 10,000
Paid In Capital – CS 210,000
b.
Treasury Stock 168,000
Cash 168,000
c.
Cash 80,000
Treasury Stock 56,000
PIC – TS 24,000
d.
Retained Earnings 84,000
Dividends Payable 84,000
Dividends Payable 84,000
Common stock 84,000
Total shares 200,000 + 10,000 = 210,000 x 40% = 84,000 shares issued
Large stock dividends are recorded at par value x # shares issued
$1 x 84,000 = $84,000
FMV of shares is ignored for large stock dividends
e.
Retained Earnings $5,000
Dividends Payable – PS $5,000
Dividends Payable – PS $5,000
Cash $5,000
Preferred dividend amount is # shares x par value x % stated
10,000 x $10 x .05 = $5,000
Then you must determine the cumulative balance for each account:
Preferred Stock $100,000
prior year entry only
Common Stock $210,000
($200,000 + $10,000)
PIC – CS $1,410,000
($1,200,000 + $210,000)
Treasury Stock $112,000
($168,000 – $56,000)
Retained Earnings $706,000
($645,000 + $150,000 -$84,000 – $5,000)
Using the account balances and the corporate information, prepare the balance sheet section for owner’s equity:
| Preferred Stock, $10 par, 5%, 25,000 shares authorized and 10,000 shares issued and outstanding | $100,000 |
| Common Stock, $1 par, 500,000 shares authorized, 210,000 shares issued, and 202,000 shares outstanding | $210,000 |
| Paid in Capital – Common Stock | $1,410,000 |
| Retained Earnings | $706,000 |
| less Treasury Stock (8,000 shares) | ($112,000) |
| Total Owner’s Equity | $2,314,000 |