Question

In 2017, the Redsox Inc. was formed. The corporate charter authorizes 1,000,000 shares of $5 par value, noncumulative, nonparticipating preferred stock, and issuance of 5,000,000 shares of common stock carrying a $1 par value. Balance sheets are prepared quarterly.

On January 2, 2018, all 1,000,000 shares of preferred stock are issued at $20 per share. Also on January 2, 3,000,000 shares of the common stock are issued in exchange for cash at an average price of $10 per share. Net income for the first quarter was $1,000,000.

During the 2^nd and 3^rd quarters, the Redsox Inc. participated in three treasury stock transactions:

4/15/2018	the firm reacquires 200,000 shares for the treasury at a price of $12 per share
5/4/2018	50,000 treasury shares are reissued at $15 per share
8/20/2018	50,000 treasury shares are reissued at $10 per share.

Net income for the second and third quarter was $3,000,000 in total.

On October 15, 2018, Board of Directors approves a 2-for-1 stock split to replace its $1 par value common stock with a new common stock issue having a $0.50 par value. That is, the shareholders will receive two shares of the $0.50 par stock in exchange for each share of the $1 par stock they own. The $1 par stock will be collected and destroyed.

On November 5, 2018, the Redsox Corporation declares a $0.05 per share cash dividend on common stock and a $0.25 per share cash dividend on preferred stock. Payment is scheduled for December 1, 2018, to shareholders of record on November 15, 2018.

On December 14, 2018, the Redsox Corporation declares and issues a 1% stock dividend. At the date of declaration, the common stock was selling in the open market at $10 per share.

Net income for the fourth quarter was $2,000,000.

Required:

Prepare journal entries for stock related transactions (i.e., issuance, repurchase, and dividends).

Prepare the December 31, 2018, shareholders’ equity section of the balance sheet for the Redsox Corporation.

Answer 1

1	Journal entry:
	Date	Account titles and explanation							Debit	Credit
	2018
	Jan 2.	Cash					(1000000*20)		20000000
		Preferred stock					(1000000*5)			5000000
		Paid in capital in excess of par-preferred stock					1000000*(20-5)			15000000
		(Issue of preferred stock)
		Cash					(3000000*10)		30000000
		Common stock					(3000000*1)			3000000
		Paid in capital in excess of par-common stock					3000000*(10-1)			27000000
		(Issue of common stock)
	Apr 15.	Treasury stock					(200000*12)		2400000
		Cash								2400000
		(Reacquires the stock)
	May 4.	Cash					(50000*15)		750000
		Treasury stock					(50000*12)			600000
		Paid in capital in excess of par-treasury stock					50000*(15-12)			150000
		(Treasury stock issued)
	Aug 20.	Cash					(50000*10)		500000
		Paid in capital in excess of par-treasury stock					50000*(12-10)		100000
		Treasury stock					(50000*12)			600000
		(Treasury stock issued)
	Nov 5.	Retained earnings							550000
		Preferred dividend payable					(Note:1)			250000
		Common dividends payable					(Note:1)			300000
		(Dividend declared)
	Dec 1.	Preferred dividend payable							250000
		Common dividends payable							300000
		Cash								550000
		(Dividend paid)
	Dec 14.	Retained earnings					(Note:2)		600000
		Common stock								30000
		Paid in capital in excess of par-common stock								570000
		(Declared and issued stock dividend)
	Note:1
	Preferred dividend:
	Preferred shares issued=1000000 shares
	Preferred dividend=$ 0.25 per share
	Preferred dividend=1000000*0.25=$ 250000
	Common dividend:
	Common shares issued before stock split=3000000 shares
	Common shares issued after stock split=3000000 *2/1=6000000
	Common dividend=$ 0.05 per share
	Common dividend=6000000*0.05=$ 300000
	Note:2
	Stock dividend:
	Common shares issued after stock split=6000000
	Common stock dividend=1%
	Common stock dividend=6000000*1%=60000 shares
	Amount to be transferred to common stock=Number of common stock*Par value=60000*0.50=$ 30000
	Market value=$10 per share
	Additional paid in capital in excess of common stock=60000*(10-0.50)=$ 570000
2				Balance sheet
	Shareholder's equity section:					$
	Common stock		(6060000*0.50)			3030000
	(Atthorized 5000000 shares of common stock,
	Issued and outstanding 3060000 shares)
	Preferred stock		(1000000*5)			5000000
	(Atthorized 1000000 shares of preferred stock,
	Issued and outstanding 1000000 shares)
	Paid in capital in excess of par-common stock
	(27000000+570000)					27570000
	Paid in capital in excess of par-preferred stock					15000000
	Paid in capital in excess of par-treasury stock
	(150000-100000)					50000
	Retained earnings				(Note:3)	4850000
						55500000
	Less: Treasury stock		(2400000-600000-600000)			1200000
	Stockholder's equity					54300000
	Note:3
				Retained earnings
						$	$
	Net income
	Q1						1000000
	Q2 & Q3						3000000
	Q4						2000000
	Total						6000000
	Less:
	Preferred dividend					250000
	Common dividend					300000
	Stock dividend					600000	1150000
	Balance						4850000