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