Question

Grayson Corporation is authorized by the state to sell 2 million shares of its $1 par value common stock to the public. Before Year Seven, the company had issued 60,000 shares for cash of $12 per share. During Year Seven, Grayson issued another 14,000 shares at the market value of $24 per share. On January 1, Year Seven, Grayson reported retained earnings of $1,950,000. During that year, Grayson earned net income of $80,000 and paid cash dividends to common stockholders of $19,000. Also, during December of Year Seven, Grayson repurchased 11,000 shares of its own stock when the market price was $22 per share. a. Record the issuance of the common stock in Year Seven. b. Determine retained earnings as of the end of Year Seven. c. Record the purchase of the treasury stock. d. Prepare the stockholders’ equity section of the balance sheet as of December 31, Year Seven. e. Compute the company’s return on equity (ROE) for Year Seven.

Answer 1

a.

Journal Entries to record the issuance of common stock in year seven
Date	Particulars	Debit	Credit
Before Year Seven	Cash(60000*12)	7,20,000.00
	To Common Stock(60000*1)		60,000.00
	To Capital in excess of par value(60000*(12-1))		6,60,000.00
	(Being Cash received for each share of 12 and accounted par value of 1 as common stock and balance as share premium/capital in excess of par value)
During Year Seven	Cash(14000*24)	3,36,000.00
	To Common Stock(14000*1)		14,000.00
	To Capital in excess of par value(14000*(24-1))		3,22,000.00
	(Being Cash received for each share of 24 and accounted par value of 1 as common stock and balance as share premium/capital in excess of par value)

b.

Retained Earnings Calculation
Date	Particulars	Amount
Jan 1 Year Seven	Opening Balance	19,50,000.00
During Year Seven	Net Income	80,000.00
During Year Seven	Cash Dividends Paid	-19,000.00
End of Year Seven	Closing Balance	20,11,000.00

c.

Journal Entries to record the purchase of Treasury Stock
Date	Particulars	Debit	Credit
December of Year Seven	Treasury Stock(11000*22)	2,42,000.00
	To Cash(11000*2)		2,42,000.00
	(Being Cash paid for repurchase of shares. So cash credited and common stock reduced by debiting treasury stock)		-

d.

Equity Calculation
Date	Particulars	Amount
	Common Stock(60000+14000)	74,000.00
	Retained Earnings(1950000+80000-19000)	20,11,000.00
	Less: Treasury Stock	-2,42,000.00
	Capital in excess of par value(660000+322000)	9,82,000.00
	Closing Balance	28,25,000.00

e.

ROE Calculation
Date	Particulars	Amount
For Year Seven	ROE = Net Income/Equity = 80000/2825000	2.83%
	Net Income before interest, dividend and tax	80,000.00
	Closing balance of equity = (74000+2011000-242000+982000)	28,25,000.00