Question

You will provide the journal entry to record issuing of common stock shares by a corporation, record issuing of cumulative preferred stock, and record a declaration of stock split.

Part 1: Company A During 2018, Company A has the following transactions involving its common and preferred stock: Issued 20,000 shares of $8 par common stock for $26 a share; brings total shares outstanding to 50,000 shares Issued 6,000 shares of $100 par, 6%, cumulative preferred stock for $150 per share When market value of the common stock reached $15 a share, Company A declared a 3-for-1 stock split, reducing the par value to $188 per shareThe following is required: 1. Prepare a journal entry for each transaction. 2. Discuss the right of shareholders of capital stock for company A that they are entitled to. 3. Company A is formed as a corporation and therefore, its shareholders have limited liability. Limited liability means that stockholders can only lose the amount of their investment. Discuss how this limited liability affects a corporation.

Part 2: Company B Company B began 2018 with a $110,000 balance in retained earnings. The following events occurred during the year: Cash dividends of $18,500 were declared. 4,500 shares of callable preferred stock were recalled and retired for a price of $225 per share. The stock was originally issued for $150 per share. Net income was $550,000. A material error in net income for a previous period was corrected. The correction of the error decreased retained earnings by $18,500 after a related income tax. The following is required: 1. Prepare the statement of retained earnings for the year ended 2013, and any note disclosures separately. 2. Discuss the restriction of retained earnings that the board of directors can impose and why it would be necessary.

Answer 1

Part 1:

1. Journal Entries:

S.No.	Particulars	Debit ($)	Credit ($)
1.	Cash (20,000*26)	520,000
	Common Shares (20,000*8)		160,000
	Additional Paid in Capital (20,000*18)		360,000
2.	Cash (6,000*150)	900,000
	Preferred Stock (6,000*100)		600,000
	Additional Paid in Capital (6,000*50)		300,000
3.	No Journal Entry for Stock Split

2. Rights of Shareholders:

• Shareholders have the right to receive income in the form of dividends.
• Right to participate in the meetings of the company and vote.
• Right to sell the stock at any point in time.
• Residual rights in the company's assets during liquidation and winding up.

3. In a Limited Liability Corporation, the shareholders are not personally liable to settle the company's debts. Their libility is limited to the extent of their investment.

Part 2:

1. Statement of Retained Earnings:

Particulars	$	$
Beginning Balance		110,000
Add: Net Income		550,000
Total		660,000
Less: Cash Dividends declared	18,500
Retirement of Shares (4,500*75)	337,500
Correction of error	18,500
		(374,500)
Ending Balance		285,500

2. Board of Directors can impose retrictions on retained earnings that do not relate to cumulative unpaid dividends. This is done by the Board of Directors to accumulate the profits of the company for a specific purpose. This is necessary to meet long term commitments, purchase of a capital asset or to meet unforeseen circumstances.