Question

Thurston Howell IV is the sole heir to the Howell Enterprise fortune. He does not participate in the business, preferring to tend to his comic book collection. He does however own a large piece of the company

Recently he had become concerned about how the company has performed specifically related to some transactions relating to stockholders’ equity.

Here is the data relating to stockholders’ equity:

Howell Enterprises

Stockholders’ Equity

As of December 31, 2019

Common Stock, 2,000,000 shares outstanding                         10,000,000

Retained Earnings                                                                           7,500,000

Total Stockholders Equity                                                               17,500,000

Thurston currently owns 300,000 shares of Howell Enterprises

Here are the relevant transactions for 2020:

1. The company issued 500,000 shares @ $8.00 per share
2. The company purchased 100,000 shares @ $15 per share
3. The company declared a $2.50 per share cash dividend
4. The company declared a 2:1 stock split

Required

1. Calculate the book value per share as of December 31, 2019. (total equity / number of shares outstanding)
2. Calculate the total value of Thurston Howell IV’s stock as of December 31, 2019. (his shares x book value per share)
3. Calculate the percentage of the company that Mr. Howell owns as of December 31, 2019. (his shares / total number of shares outstanding)
4. Prepare journal entries for the transactions listed above
5. Calculate the ending balances in the equity accounts
6. Calculate the book value per share after the transactions have been recorded
7. Calculate the total value of Thurston Howell IV’s stock after the transactions have been recorded. (his shares x new book value per share)
8. Calculate the percentage of the company that Mr. Howell owns after the transactions have been recorded. (his shares x new total outstanding shares).
9. Calculate the amount of loss that Mr. Howell has suffered (if any) as a result of the above transactions. (compare #2 to # 7).
10. Write a summary in Word explaining your results. Which transactions caused Mr. Howell to lose money?

Record the transactions for 2020 and calculate the ending balances in all of the stockholder’s equity accounts.

Please organize the answers.

Trans	Accounts	Debit	Credit

Ending Balances
Common Stock
Retained Earnings
Treasury Stock
Total Equity
# of Shares Outstanding
Book Value Per Share

Mr. Howell’s Investment

	Before Transactions	After Transactions
Book Value Per Share
Total Value of Stock
% of Company Owned

Turn in the summary with this page

Answer 1

Mr. Howell’s Investment
Before Transactions
Book Value Per Share	$8.75
Total Value of Stock	$2,625,000
% of Company Owned	15.00%

Transaction	Accounts	Debit	Credit
New Issue	Cash (500,000 * $8)	$4,000,000
	Common Stock (500,000 * $5)	$2,500,000
	Paid in Capital in excess of par (500,000 * $3)	$1,500,000
	To record 500,000 common stock of $5 par value issued at $8 per share
Share Purchase	Treasury Stock- Common (100,000 * $15)	$1,500,000
	Cash		$1,500,000
	To record 100,000 common shares purchased for the treasury at $15 per share
Dividend Declared	Retained Earnings (2,400,000 * $2.5)	$6,000,000
	Dividends Payable		$6,000,000
	To record cash dividend on common stock declared
Stock Split	Common Stock (2,500,000 shares of $5 each)	$12,500,000
	Common Stock (5,000,000 shares of $2.5 each)	$12,500,000
	To record 2:1 stock split of shares of $5 par value

Ending Balances
Common Stock	$12,500,000
Retained Earnings	$3,000,000
Treasury Stock	$1,500,000
Total Equity	$14,000,000
# of Shares Outstanding	4,800,000
Book Value Per Share	$2.92

Mr. Howell’s Investment
	Before Transactions	After Transactions
Book Value Per Share	$8.75	$2.92
Total Value of Stock	$2,625,000	$1,750,000
% of Company Owned	15.00%	12.50%

Total Value of Stock before transactions (a)	$2,625,000
Total Value of Stock after transactions (b)	$1,750,000
Reduction in Value (a - b)	$875,000
Less: Dividend received	$750,000
Total Loss Mr. Howell has suffered	$125,000

The loss suffered by Mr. Howell is due to issue of new shares and purchase of shares under the first 2 Transactions.