Question

Homestead Oil Corp. was incorporated on January 1, 2016, and issued the following stock for cash:

  

760,000 shares of no-par common stock were authorized; 160,000 shares were issued on January 1, 2016, at $18.00 per share.

270,000 shares of $110 par value, 9.00% cumulative, preferred stock were authorized, and 66,000 shares were issued on January 1, 2016, at $130 per share.

Net income for the years ended December 31, 2016 and 2017, was $1,290,000 and $2,610,000, respectively.

No dividends were declared or paid during 2016. However, on December 28, 2017, the board of directors of Homestead declared dividends of $1,840,000, payable on February 12, 2018, to holders of record as of January 19, 2018.

1. Use the horizontal model for the issuance of common stock and preferred stock on January 1, 2016. (Use amounts with + for increases and amounts with – for decreases.)

2. Use the horizontal model for the declaration of dividends on December 28, 2017. (Use amounts with + for increases and amounts with – for decreases.)

3. Use the horizontal model for the payment of dividends on February 12, 2018. (Use amounts with + for increases and amounts with – for decreases.)

Answer 1

a.

Issuance of common stock and preferred stock on January 1, 2016:

Common stock = 160,000 × $18 = $2,880,000

Preferred stock = 66,000 × $110 = $7,260,000

Additional paid up capital = 66,000 × $20 = $1,320,000

Balance sheet					Income statement
Asset	=	Liabilities	+	stockholders’ equity	Net income	=	Revenue	-	Expense
Cash will increase by $2,880,000				Common stock will increase by $2,880,000
Cash will increase by $8,580,000				Preferred stock will increase by $7,260,000
				Additional paid up capital will increase by $1,320,000

b.

Declaration of dividends on December 28, 2017:

Balance sheet					Income statement
Asset	=	Liabilities	+	stockholders’ equity	Net income	=	Revenue	-	Expense
		Will increase by $1,840,000 in the form of dividend payable		Retained earnings will decrease by $1,840,000

c.

Payment of dividends on February 12, 2018:

Balance sheet					Income statement
Asset	=	Liabilities	+	stockholders’ equity	Net income	=	Revenue	-	Expense
Cash will decrease by $1,840,000 of dividend payable		will decrease by $1,840,000