Question

Morrow Enterprises Inc. manufactures bathroom fixtures. Morrow Enterprises’ stockholders’ equity accounts, with balances on January 1, 20Y6, are as follows:

Common stock, $20 stated value (500,000 shares authorized, 367,000 shares issued)	$7,340,000
Paid-In Capital in Excess of Stated Value—Common Stock	844,100
Retained Earnings	33,388,000
Treasury Stock (22,800 shares, at cost)	387,600

The following selected transactions occurred during the year:

Jan.	22	Paid cash dividends of $0.09 per share on the common stock. The dividend had been properly recorded when declared on December 1 of the preceding fiscal year for $30,978.
Apr.	10	Issued 71,000 shares of common stock for $23 per share.
Jun.	6	Sold all of the treasury stock for $27 per share.
Jul.	5	Declared a 3% Stock dividend on common stock, to be capitalized at the market price of the stock, which is $26 per share.
Aug.	15	Issued the certificates for the dividend declared on July 5.
Nov.	23	Purchased 28,000 shares of treasury stock for $18 per share.
Dec.	28	Declared a $0.09-per-share dividend on common stock.
	31	Closed the two dividends accounts to Retained Earnings.

	Required:
1.	Enter the January 1 balances in T accounts for the stockholders’ equity accounts listed. If required, round your answers to the nearest dollar.
2.	Journalize the entries to record the transactions, and post to the eight selected accounts. Assume that the closing entry for revenues and expenses has been made and post net income of $1,131,500 to the retained earnings account. Refer to the Chart of Accounts for exact wording of account titles. When required, round your answers to the nearest dollar.
3.	Prepare a statement of stockholders’ equity for the year ended December 31, 20Y6. Assume that net income was $1,131,500 for the year ended December 31, 20Y6. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is an amount is zero, enter "0".*
4.	Prepare the “Stockholders’ Equity” section of the December 31, 20Y6, balance sheet. For those boxes in which you must enter subtracted or negative numbers use a minus sign.* * Refer to the list of Amount Descriptions provided for the exact wording of the answer choices for text entries.

Answer 1

1. Enter the January 1 balances in T accounts for the stockholders’ equity accounts listed.

Answer:

Common Stock
			Jan-01	Balance	7,340,000
			Apr-10		1,420,000
			Aug-15		262,800
			Dec-31	Balance	9,022,800
Paid in Capital in excess of stated value - common stock
			Jan-01	Balance	844,100
			Apr-10		213,000
			Jul-05		78,840
			Dec-31	Balance	1,135,940
Retained Earnings
Dec-31		379,723	Jan-01	Balance	33,388,000
			Dec-31		1,131,500
			Dec-31	Balance	34,139,777
Treasury Stock
Jan-01	Balance	387,600	Jun-06		387,600
Nov-23		504,000
Dec-31	Balance	504,000
Paid in capital from Sale of Treasury stock
			Jun-06		228,000
Stock Dividends Distributable
Aug-15		262,800	Jul-05		262,800
Stock Dividends
Jul-05		341,640	Dec-31		341,640
Cash Dividends
Dec-28		38,083	Dec-31		38,083

2. Journalize the entries to record the transactions, and post to the eight selected accounts. Assume that the closing entry for revenues and expenses has been made and post net income of $1,131,500 to the retained earnings account.

Answer:

Date	General Journal	Debit	Credit
Jan-22	Cash Dividends Payable	30,978
	Cash		30,978
	To record the payment of cash dividends
Apr-10	Cash	1,633,000
	Common Stock		1,420,000
	Paid in Capital in excess of stated value - common stock		213,000
	To record the issurance os shares in excess of stated value
Jun-06	Cash	615,600
	Treasury Stock		387,600
	Paid in capital from Sale of Treasury stock		228,000
	To record sale of treasury stock for above the cost price
Jul-05	Stock Dividends	341,640
	Stock Dividends Distributable		262,800
	Paid in Capital in excess of stated value - common stock		78,840
	To record the distribution of stock dividends
Aug-15	Stock Dividends Distributable	262,800
	Common Stock		262,800
	To record the distribution of stock dividends
Nov-23	Treasury Stock	504,000
	Cash		504,000
	To record the purchase of shares of treasury stock
Dec-28	Cash Dividends	38,083
	Cash Dividends Payable		38,083
	To record declaration of cash dividend
Dec-31	Income Summary	1,131,500
	Retained Earnings		1,131,500
	To close credit balance of income summary
Dec-31	Retained Earnings	379,723
	Stock Dividends		341,640
	Cash Dividends		38,083
	To record the closing of stock dividends and cash dividends to retained earnings

3. Prepare a statement of stockholders’ equity for the year ended December 31, 20Y6. Assume that net income was $1,131,500 for the year ended December 31, 20Y6.

Answer:

	Common Stock	Paid in capital in excess of Stated Value - Common Stock	Paid in capital from Treasur stock	Retained Earnings	Treasury Stock	Total Equity
Balances, January 1	7,340,000	844,100		33,388,000	-387,600	41,184,500
Issued common stock	1,420,000	213,000				1,633,000
Net Income				1,131,500		1,131,500
Cash dividends				-38,083		-38,083
Stock dividends	262,800	78,840		-341,640		0
Sale of Treasury stock			228,000		387,600	615,600
Purchase of Treasury Stock					-504,000	-504,000
Balances, December 31	9,022,800	1,135,940	228,000	34,139,777	-504,000	44,022,517

4. Prepare the “Stockholders’ Equity” section of the December 31, 20Y6, balance sheet.

Answer:

Morrow Enterprises Inc
Partial Balance Sheet
Paid-in capital
Common stock, $20 stated value (500,000 shares authorized, 451,140 shares issued)	9,022,800
Excess of issue price over stated value	1,135,940
From sale of treasury stock	228,000
Total paid-in capital		10,386,740
Retained earnings		34,139,777
Total		44,526,517
Deduct Treasury stock 28,000 shares at cost)		504,000
Total stockholders' equity		44,022,517

Calculation

First, we need to prepare the journal entries before posting to ledger entries even though the question order is different.

Treasury stock cost per share = Total value of treasury stock / No. of treasury stock in hand = 387,600/22,800 = 17

No of shares outstanding after June 6 :

Outstanding number of shares = 367,000 + 71,000 = 438,000

Stock dividend shares = Stock dividend shares * stock dividend % = 438,000 * 3% = 13,140

Stock dividends = Stock dividend shares * market value = 13,140 * 26 =

So to prepare the entries the below calculation need to be made.

Jan -22:

To record the payment of cash dividend:

Cash dividend payable = 367,000 - 22,800 * 0.09 = 30,978

April 10:

To record the issurance os shares in excess of stated value:

Cash = 71,000 * 23 = 1,633,000

Common stock = 71,000 * 20 = 1,420,000

Paid in capital in excess of stated value = 71,000 * (23-20) = 213,000

June 06:

To record sale of treasury stock for above the cost price:

Cash = 22,800 *27 = 615,600

Treasury stock = 22,800 * 17 = 387,600

Paid in capital from Sale of Treasury stock = 22,800 * (27-17) = 228,000

July 05:

To record the distribution of stock dividends:

Stock Dividends = (367,000 + 71,000) * 3% * 26 = 341,640

Stock Dividends Distributable = (367,000+71,000)*3% = 13,140

= 13,140 * 20 = 262,800

Paid in Capital in excess of stated value - common stock = 422,380 - 262,800 = 78,840

Aug -15:

To record the distribution of stock dividends:

Stock Dividends Distributable = (367,000+71,000)*3% = 13,140

= 13,140 * 20 = 262,800

Nov 23:

To record the purchase of shares of treasury stock:

Treasury Stock = 28,000 * 18 = 504,000

Dec 28:

To record declaration of cash dividend:

Cash Dividends = (367,000 + 71,000 + 13,140 - 28,000) * 0.09 = 38,083

After doing the journal entries, we need to post this to the respective ledger accounts. There will be 8 leadger accounts which is covered in the required 1. The balances of these ledger accounts goes to the balancesheet.

Then we need to do the Statement of equity. For that first we could do the retained earnings statement to get the balance and then complete the statement of equity.

Morrow Enterprises Inc
Retained earnings Statement
Retained earnings January 1		33,388,000
Net Income	1,131,500
Less: Cash dividends	-38,083
Less: Stock dividends	-341,640
Increase in retained earnings		751,777
Retained earnings December 31		34,139,777

There no other calculation required after we complete the journal entries. The next step is to do the balance sheet section of Stock holders equity.

Here we need to add the details from the final balance of the statement of shareholders equity statement we prepared. Also to get the number of shares issued:

Common stock Balances, December 31 = 9,022,800

stated value = 20

Number of shares issued = 9,022,800/20 =451,140