Question

The shareholders’ equity portion of the balance sheet of Sessel’s Department Stores, Inc., a large regional specialty retailer, is as follows: 

Disclosures elsewhere in Sessel’s annual report revealed the following changes in shareholders’ equity accounts for 2022, 2021, 2020 

2022: 

1. The only changes in retained earnings during 2022 were preferred dividends on preferred stock of $3,388,000 and net income. 

2. The preferred stock is convertible. During the year, 6,592 shares were issued. All shares were converted into 320,000 shares of common stock. No gain or loss was recorded on the conversion. 

3. Common shares were issued in a public offering and upon the exercise of stock options. On the statement of shareholders’ equity, Sessel’s reports these two items on a single line entitled: “Issuance of shares.” 

2021: 

1. Net income: $12,126,000. 

2. Issuance of common stock: 5,580,000 shares at $112,706,000. 

2020: 

1. Net income: $13,494,000. 

2. Issuance of common stock: 120,000 shares at $826,000. 

 

Required: 

From these disclosures, prepare comparative statements of shareholders’ equity for 2022, 2021, and 2020.

Answer 1

Statement of Shareholders’ Equity

The financial statement which shows the changes in the equity capital and net income for a given period of time is known as statement of stockholders’ equity.

 

Prepare comparative statement of shareholders’ equity for 2020 to 2022 for Incorporation SDS.

Incorporation SDS
Statement of Shareholders’ Equity
For the Years Ended December 31, 2020, 2021, and 2022
(Amounts in Thousands)
Particulars	Preferred Stock	Common Stock	Additional Paid-in Capital	Retained Earnings	Total Shareholders’ Equity
	Series A	Series B
December 31, 2014	-	-	$1,288	$88,468	$19,178	$108,934
Net income	-	-	-	-	13,494	13,494
Issuance of common stock	-	-	12	814		826
December 31, 2020	-	-	1,300	89,282	32,672	123,254
Net income	-	-	-	-	12,126	12,126
Issuance of common stock	-	-	558	112,148	-	112,706
December 31, 2021	-	-	1,858	201,430	44,798	248,086
Net income	-	-	-	-	32,256	32,356
Issuance of shares	57,700	6,592	104	20,002	-	84,398
Conversion of Series B preferred stock	-	(6,592)	32	6,560	-	-
Preferred dividends	-	-	-	-	(3,388)	(3,388)
December 31, 2022	$57,700	$0	$1,994	$227,992	$73,666	$361,352

 

Working Notes:

Compute net income of 2022.

Particulars	Amount ($)
Balance on December 31, 2022	73,666,000
Less: Balance on December 31, 2021	(44,798,000)
Net income in 2022	28,868,000
Changes in retained earnings	3,388,000
Balance on December 31, 2022	$32,256,000

 

Compute common stock value due to conversion of Series B preferred stock in 2022.

Common stock value = {Number of common shares due to conversion × Per value of stock}

                                     = 32,000 shares × $1

                                     = $32,000 …………………. (1)

 

Compute additional paid-in capital\r\nvalue due to conversion of Series B preferred stock in 2022.

Additional paid in capital = {Value of Series B preferred stock – Common stock value}

                                          = $6,592,000 - $32,000

                                          = $6,560,000 ………….. (2)

 

Compute common stock value in 2022.

Particulars	Amount ($)
Balance on December 31, 2022	1,994,000
Less: Balance on December 31, 2021	(1,858,000)
	136,000
Less: Common stock due to conversion of Series B preferred stock	(32,000)
Balance on December 31, 2022	$104,000

 

Note: Refer to Equation (1) for value and computation of common stock value.

 

Compute additional paid in stock value in 2022.

Particulars	Amount ($)
Balance on December 31, 2022	227,992,000
Less: Balance on December 31, 2021	(201,430,000)
	26,562,000
Less: Additional paid-in capital due to conversion of Series B preferred stock	(6,560,000)
Balance on December 31, 2022	$20,002,000

 

Note: Refer to Equation (2) for value and computation of additional paid-in capital value.

Statement of Shareholders’ Equity

The financial statement which shows the changes in the equity capital and net income for a given period of time is known as statement of stockholders’ equity.