Question

Use the following information to answer the next __4__ questions.

Lucent Technologies, Inc. created the Statement of Owners’ Equity for its year ended December 31, 2017.

2017	Common	Paid-in	Preferred	Retained	Treasury
Transaction	Stock	Capital	Stock	Earnings	Stock	Total
Beginning balance	$1,450,000	$2,700,000	$750,000	$4,825,000	-$60,000	$9,665,000
March	250,000	400,000		-650,000		0
June				-5,000	25,000	20,000
August	100,000	210,000				310,000
October			400,000			400,000
November				-48,000		-48,000
December				1,500,000		1,500,000
Ending balance	$1,800,000	$3,310,000	$1,150,000	$5,622,000	-$35,000	$11,847,000

1. On the Balance Sheet at December 31, 2017, how much will be shown in the Owners’ Equity section under the caption Contributed Capital?

      a. $ 5,622,000                     b. $5,110,000                c. $6,260,000                d. $1,800,000

2. Which transaction most likely represents a declaration and payment of cash dividends?

      a. June                    b. November                  c. December                   d. March

3. Which transaction most likely represents a declaration and payment of stock dividends? And was the dividend large or small?

        Transaction       Dividend size

a.       March             small

b.   August            small

c.    October            large

d.   December         large

4. What is the most likely explanation for the change in the treasury stock account during the year?

      a. treasury stock was purchased                       b. treasury stock was sold at more than cost

      c. treasury stock was sold at less than cost        d. the market value of treasury stock increased

Answer 1

• Answer to 1: OPTION – C : $6,260,000

Contributed capital includes Stock value subscribed, and includes extra paid in capital.

Hence, 1800000 + 3310000 + 1150000 = $6,260,000

• Answer to 2: OPTION – B : November

When cash dividend is declared and paid, it is transferred to Retained Earnings as a ‘deduction’ to Retained earnings. No other account of Owner’s Equity gets affected except Retained Earnings. Hence, $48000 deducted in November will be Cash dividend.

• Answer to 3: OPTION – A : March and Large Dividend size

Retained earnings in March are reduced by $650000 and there is increase in Common Stock, which means Stock Dividend is declared/given. Also there is an increase in Paid in Capital, hence this must be a large dividend size.

• Answer to 4: OPTION – C: treasury stock was sold at less than cost.

In June, Treasury Stock is affected by $25000, which means it is sold, as the closing balance is also than opening balance. Since, Retained Earnings are reduced by $5000 (which means they are debited in Journal Entry), the treasury stocks are sold at less than their COST.