Question

The Mystic Company lists the following stockholders’ equity items on 12/31/17:

6% preferred stock, $100 par, 50,000 shares authorized, 10,000 shares issued $1,000,000

Common stock, $10 par, 500,000 shares authorized, 200,000 shares issued 2,000,000

Paid-in Capital in excess of par - Preferred 500,000

Paid-in Capital in excess of par - Common 800,000

Retained Earnings 700,000

Less: Treasury stock (3,750 shares at cost) (60,000)

Total Stockholders’ Equity $4,940,000

During 2018, Mystic engaged in the following transactions affecting stockholders’ equity:

(1) On 1/1/18, Mystic established a stock option plan giving certain employees the right to purchase 20,000 shares of Mystic common stock at a price of $20. The market price of the common stock on the date of grant was $22, and the fair value of each option is $3. The options may be exercised any time after 1/1/18, and the executives must be in Johnson’s employ at the time of exercise. The service period is considered to be two years.

(2) On 3/10, reacquired 1,250 shares of common stock by purchase at a price of $23 per share.

(3) On 3/15, declared its first quarterly dividend on the preferred stock and a dividend of $.10 per share on its common stock to stockholders of record on 3/31. The dividend was paid on 4/10.

(4) Not wanting to deplete its cash reserves for the expected quarterly dividend, on 6/15, Mystic declared a preferred stock dividend and a property dividend payable on 7/15 to common stockholders of record on 6/30. The dividend consists of 19,475 shares of Baxter Corporation common stock, which has a book value of $2.20 per share. On 6/15, the stock is selling for $2.50 per share.

(5) On 9/15, declared the third quarterly preferred dividend and a 1% stock dividend to common stockholders of record on 9/30, to be distributed 10/15. The market price of Mystic’s common stock on 9/1 is $24.50.

(6) On 10/31, reissued 3,000 shares of treasury stock for $25 per share. Mystic uses the FIFO cost flow assumption for its treasury stock.

(7) On 11/1, sold 1,000 shares of common stock to a supplier for $25.

(8) On 12/15, declared the fourth quarter’s dividend on preferred stock and a $.10 per share dividend on the common stock. Dividends are payable 1/15/19 to shareholders of record on 12/31/18.

(9) Net income for 2018 was $475,000 before any adjustments you may have made above that affect income. The market price of the common stock at 12/31/18 was $25.75 per share, and the market price of the preferred stock was $110. The average price of the common stock during 2018 was $24.00.

Required:

a) Prepare all journal entries required in 2018 as a result of the transactions listed above.

b) Prepare, in good form, the statement of retained earnings for Mystic as of 12/31/18.

c) Prepare, in good form, the stockholders’ equity section for Mystic as of 12/31/18.

Answer 1

Particulars	$	$
Retained earnings
Opening ($ 700000-60000)		6,40,000
Add : Net Income	4,75,000
Less : Proposed Dividend
15-03-2018	-34,500
15-06-2018	-15,000
15-09-2018	-62,775
15-12-2018	-35,095
Less : Dividend paid	-42,845
Less : Loss on transfer of investments	-5,843	2,78,943
Closing		9,18,943
Less : Treasury stock (cost)		-40,750
(60000+28750- 48000)
Net retained earnings		8,78,193

Statement of Stockholders equity as on 31/12/2018
Particulars	$	$
6% preferred stock
Opening	10,00,000
Add: Issues	-
Less : Redemptions	-
Closing		10,00,000
Common Stock	-
Opening	20,00,000
Add: Issues
15-10-2018	19,500
01-11-2018	10,000
	29,500
Less : Sales	-
Closing		20,29,500
Paid in excess of par - common
Opening	8,00,000
Additions (28275+15000)	43,275
Closing		8,43,275
Paid in excess of par - Preferred
Opening	5,00,000
Additions	-
Closing		5,00,000
Paid in excess of par - Treasury
Opening	-
Additions (27000-16250)	10,750
Closing		10,750
Net Retained earnings		8,78,193
Total Stock holders equity		52,61,718

Journal Entries in the Books of Mystic Company
Date	Particulars	$	$
01-01-2018	No Entry for issue of Employee stock options
10-03-2018	Treasury Stock (1250 shares *23)	28,750
	Paid in Capital in excess of Par - Treasury (1250 shares *13)	16,250
	Cash		28,750
Being the reacquisition of 1250 treasury stock @ 23 per share
15-03-2018	Retained earnings	34,500
	Proposed Dividend - Common Stock		19,500
	(200000 - 3750-1250 shares) *$0.10 per share
	Proposed Dividend - Preferred Stock		15,000
	(10000 shares * 100 par *6% * 3 months)
Being dividend declared to common stock holders and Preferred stock holders
10-04-2018	Proposed Dividend - Common Stock	19,500
	Proposed Dividend - Preferred Stock	15,000
	Cash		34,500
Being dividend declared to common stock holders and Preferred stock holders paid
15-06-2018	Retained earnings	15,000
	Proposed Dividend - Preferred Stock		15,000
	(10000 shares * 100 par *6%* 3 Months)
Being dividend declared to preferred stock holders
15-07-2018	Dividend expense - Common Stock	42,845
	(19475 shares *$2.20 per share)
	Loss on transfer of shares	5,843
	(19475 shares *$0.30 per share)
	Shares of Baxter Corporation		48,688
	(19475 shares *$2.20 per share)
Being stock dividend paid to common stock holders by way of shares of
Baxter Corporation at Book value of $ 2.20 per share and loss there after recognised

15-09-2018	Retained earnings	15,000
	Proposed Dividend - Preferred Stock		15,000
	(10000 shares * 100 par *6%* 3 Months)
Being dividend declared to preferred stock holders
15-09-2018	Retained earnings	47,775
	Proposed Stock Dividend - Common Stock		47,775
	(200000 - 3750-1250 shares) *$24.50 per share * 1%
Being 1% stock dividend paid to common stock holders at Market price of $ 24.50
15-10-2018	Proposed Stock Dividend - Common Stock	47,775
	Common stock		19,500
	(200000 - 3750-1250 shares) *$10 per share * 1% i.e 1950 shares
	Paid in Capital in excess of Par - Common		28,275
	(200000 - 3750-1250 shares) *$14.50 per share * 1%
Being issue of Common stock at 24.50 per share in lieu dividend payable to common stockholders
31-10-2018	Cash	75,000
	Treasury Stock (3000 shares *16)		48,000
	(60000/3750 = 16 per share)
	Paid in Capital in excess of Par - Treasury (3000 shares *9)		27,000
Being re- issue of treasury stock at 25 per share at a cost of 16 pe share using FIFO method
01-11-2018	Supplier (1000 shares *25)	25,000
	Common stock		10,000
	(1000 shares *10)
	Paid in Capital in excess of Par - Common		15,000
	(1000 shares *15)
Being issue of common stock at 25 per share in lieu of dues for supplier
15-12-2018	Retained earnings	35,095
	Proposed Dividend - Common Stock		20,095
	(200000 - 3750-1250+3000+1000+1950 shares) *$0.10 per share
	Proposed Dividend - Preferred Stock		15,000
	(10000 shares * 100 par *6% * 3 months)
Being dividend declared to common stock holders and Preferred stock holders