Question

Stockholders' Equity Category

Peeler Company was incorporated as a new business on January 1, 2017. The corporate charter approved on that date authorized the issuance of 1,000 shares of $100 par, 7% cumulative, nonparticipating preferred stock and 10,000 shares of $5 par common stock. On January 10, Peeler issued for cash 500 shares of preferred stock at $120 per share and 4,000 shares of common stock at $80 per share. On January 20, it issued 1,000 shares of common stock to acquire a building site at a time when the stock was selling for $70 per share.

During 2017, Peeler established an employee benefit plan and acquired 500 shares of common stock at $60 per share as treasury stock for that purpose. Later in 2017, it resold 100 shares of the stock at $65 per share.

On December 31, 2017, Peeler determined its net income for the year to be $40,000. The firm declared the annual cash dividend to preferred stockholders and a cash dividend of $5 per share to the common stockholders. The dividends will be paid in 2018.

Required:

1. Develop the Stockholders' Equity category of Peeler's balance sheet as of December 31, 2017. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Peeler Company
Partial Balance Sheet
December 31, 2017
Stockholders' equity
Preferred stock, $100 par, 7%, 1,000 shares authorized, 500 shares issued and outstanding	$
Common stock, $5 par, 10,000 shares authorized, 5,000 shares issued, 4,600 shares outstanding
Additional paid-in capital-preferred stock
Additional paid-in capital-common stock
Additional paid-in capital-treasury stock
Total contributed capital	$
Retained earnings
Treasury stock, 400 shares, common
Total stockholders' equity	$

Feedback

1) When stock is issued for cash, the amount of its par value should be reported in the stock account and the amount in excess of par should be reported in the related additional paid-in capital account. Determine the appropriate account balances for the Preferred and Common Stock accounts and the related additional paid-in capital accounts.
2) Retained earnings is the accumulation of net income/loss minus dividends. Determine the account balance in Retained earnings.
3) Treasury stock is created when a company buys back (repurchases) its own stock. Determine the balance in the Treasury stock account.
4) The Stockholders' Equity section lists the contributed capital accounts, retained earnings and other accounts (e.g. Treasury stock).

2. Indicate on the statement the number of shares authorized, issued, and outstanding for both preferred and common stock.

	Preferred Stock	Common Stock
Number of shares authorized
Number of shares issued
Number of shares outstanding

Answer 1

Peeler Company
Partial Balance Sheet
December 31, 2017
Stockholders' equity
Preferred stock, $100 par, 7%, 1,000 shares authorized, 500 shares issued and outstanding	$ 50,000
Common stock, $5 par, 10,000 shares authorized, 5,000 shares issued, 4,600 shares outstanding	$ 25000
Additional paid-in capital-preferred stock	$ 10,000
Additional paid-in capital-common stock	$ 365,000
Additional paid-in capital-treasury stock	$500
Total contributed capital	$450,500
Retained earnings	$18,500
Less :Treasury stock, 400 shares, common @ $60 per share	-$24000
Total stockholders' equity	$ 445,000

	Preferred Stock	Common Stock
Number of shares authorized	1,000	10,000
Number of shares issued	500	5,000
Number of shares outstanding	5,00	5,000

Working Notes:

Journal entries related to common stock and preferred stock of Peeler company :

1. Cash A/C ($500x$120)                                              Dr.       60,000

         Preferred Stock ($500x$100)                                                                     50,000                                                                    

         Additional Paid-in Capital Preferred Stock ($500x$20)                           10,000                                                                                              

(Being preferred stock issued for cash at premium of $20 ($120-$100) per share ($500x $ 20)           

1. Cash A/C ($4000x$80)                                              Dr.       320,000

            Common Stock ($4000x$5)                                                                        20,000                                                                    

          Additional Paid-in Capital Common Stock ($4000x$75)                           300,000                                                                                              

(Being common stock issued for cash at premium of $75 ($80-$5) per share ($4000x $ 75)

                             

1. Building A/C ($1000x$70)                                              Dr.       70,000

           Common Stock ($1000x$5)                                                                        5,000                                                                    

           Additional Paid-in Capital Common Stock ($1000x$65)                           65,000                                                                                              

(Being common stock issued for cash at premium of $65 ($70-$5) per share ($1000x$65)     

Journal entries relating to treasury stock of Peeler company

     Reacquired 500 common shares of its own                               

1. Treasury stock Common A/C ($500x$60)                    Dr.       30,000

           Cash ($500x$60)                                                                        30,000                                                                    

          (Being reacquired 500 common shares of its own at a rate 0f $60 per share)

   Resold treasury stock common

1. Cash A/c   ($100x$65)                                           Dr.             6500

Treasury stock Common A/C ($100x$60)6,000

Paid-in Capital Treasury Stock ($100x$5)5,00

(Being resold 100 shares of treasury stock at the rate of $65 per share)    

Calculation of net income transferred to retained earnings and balance of retained earnings which will fall under stockholder’s equity of Peeler company

Net Income given for the year (2017)		40,000
Less: Cash dividend paid to Prefferred stockholders ($ 50000 x 0.07)	-$3,500
Cash dividend to common stockholdersn( $3600 x $5)	-$18,000
Net Income transferred to retained earnings		$18,500

Therefore from the above table it is clear that the balance of retained earnings is $18,500 which will fall underStockholder’s Equity section of Peeler Company at the end of the year.

Note : Cash dividend will be declared on the outstanding shares only.Hence outstanding sharesare 36,00 ($4000-(500-100).