Question

Fatahie Corporation has the following capital structure at the beginning of the year:

5% Preferred stock, $50 par value, 20,000 shares authorized,      6,000 shares issued and outstanding	$300,000
Common stock, $10 par value, 60,000 shares authorized,      40,000 shares issued and outstanding	400,000
Paid-in capital in excess of par	110,000
Total paid-in capital	810,000
Retained earnings	440,000
Total stockholders’ equity	$1,250,000

Instructions

1. Record the following transactions which occurred consecutively (show all calculations.

1. A total cash dividend of $90,000 was declared and payable to stockholders of record. Record dividends payable on common and preferred stock in separate accounts.
2. A 15% common stock dividend was declared. The average fair value of the common stock is $18 a share.
3. Assume that net income for the year was $120,000 (record the closing entry) and the board of directors appropriated $70,000 of retained earnings for plant expansion.

2. Construct the stockholders’ equity section incorporating all the above information.

Answer 1

Solution

A. Journal entries:

Account titles and explanation	Debit	Credit
Retained Earnings	$90000
Dividend payable- Preferred (300000×.05)		$15000
Dividend payable- Common		$75000
(To record dividend payable to shareholders)
Retained earnings(6000*$18)	$108,000
Common stock-Dividend Distributable(6000*$10)		$60,000
Paid in capital in excess of part(6000*$8)		$48,000
(To record stock dividend)(40000 shares*15%=6000 shares)
Income summary	$120,000
Retained Earnings		$120,000
(To record closing of net income)
Retained earnings	$70,000
Retained earnings Appropriated for plant expansion		$70,000
(To record appropriation of retained earnings for plant expansion)

B. Stockholders equity:

5% Preferred stock, $50 part value, 20,000 shares authorized, 6000 shares issued and outstanding		$300,000
Common stock, $10 part value, 60,000 shares authorized, 40000 shares issued and outstanding		$400,000
Common stock dividend Distributable		$60,000
Paid in capital in excess of par (110000+48000)		$158,000
Total paid in capital		$918,000
Retained earnings-unappropriated*	$292,000
Appropriated for plant expansion	$70,000
Total retained earnings		$362,000
Total stockholders equity		$1,280,000
*$440,000-$90,000-$108,000+$120,000-$70,000=$292,000