Question

Homestead Oil Corp. was incorporated on January 1, 2019, and issued the following stock for cash: 820,000 shares of no-par common stock were authorized; 150,000 shares were issued on January 1, 2019, at $18.00 per share. 260,000 shares of $90 par value, 9.00% cumulative, preferred stock were authorized; 76,000 shares were issued on January 1, 2019, at $130 per share. Net income for the years ended December 31, 2019 and 2020 was $1,350,000 and $2,660,000, respectively. No dividends were declared or paid during 2019. However, on December 28, 2020, the board of directors of Homestead declared dividends of $1,480,000, payable on February 12, 2021, to holders of record as of January 19, 2021.

1. Use the horizontal model for the issuance of common stock and preferred stock on January 1, 2019. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

2. Use the horizontal model for the declaration of dividends on December 28, 2020. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

3. Use the horizontal model for the payment of dividends on February 12, 2021. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

Answer 1

First, we must know the exact value of the shares. To get it, we must multiply theamount of each times their assigned value.

• Common stock  150,000*18 =                   2,700,000
• Preferred stock 76,000 *130=                  9,880,000
• Cash = 12,580,000. The cash is the sum of the preferred and common stock values.

In order to prepare the financial statement, we also must get the value of the preferred stock at the par value assigned

• Preferred stock  76,000 *90=                       6,840,000

As the preferred shares are issued at a higher price than their par value, we also have to find the Additional paid in capital-preferred. we can do it by substracting

• Preferred stock 76,000 *130= 9,880,000
• Preferred stock  76,000 *90=       6,840,000
• Additional paid in capital-preferred= 3,040,000

Now that we have all the data needed we can start working with the statements

1.Use the horizontal model for the issuance of common stock and preferred stock on January 1, 2019. Indicate the financial statement effect

Balance Sheet

Assets	Liabilities	Stockholders’ equity	Financial statement Effect
Cash +12,580,000		Common stock +2,700,000	+
		Preferred stock +6,840,000	+
		Additional paid in capital-preferred +3,040,000	+

The effect is positive because the aditional paid increases the total stockholders equity.

2. Use the horizontal model for the declaration of dividends on December 28, 2020. Indicate the financial statement effect.

Assets	Liabilities	Stockholders’ equity	Financial statement Effect
	Dividends payable +1,480,000	Retained earnings + 1,480,000	-

The effect is negative because it means an increase on the liabilities of the company.

3. Use the horizontal model for the payment of dividends on February 12, 2021. Indicate the financial statement effect

Assets	Liabilities	Stockholders’ equity	Financial statement Effect
Cash +1,480,000	Dividends payable +1,480,000		-

The effect is negative because it represents a decrease of the cash owned by comprany