Question

Tara’s Treasures is authorized to sell 250,000 shares of 5%, $100 PAR Value Preferred Stock and 1,500,000 shares of COMMON stock, $4 par.

The Stockholder’s Equity Section Dec 31^st 2019:

Preferred Stock 5%, $100 Par 250,000 shares Authorized,

100,000 Shares Issued                                    $10,000,000

Common Stock, $4 Par, 1,500,000 Shares Authorized

500,000 Shares Issues & Outstanding $2,000,000

Paid in Capital in Excess of Par, Common        $3,000,000

Retained Earnings                                             $4,500,000

During 2020 Tara’s Treasures had the following transactions:

1. Jan 1, 2020: Tara declared the Preferred Dividend and a $2.50 Common Dividend, Date of Record Jan 15 and Payment Date Jan 30^th.
2. Jan 30^th: Paid the Dividend
3. Feb 1^st: Tara issued 50,000 shares of Common Stock for $10 per share.
4. Feb 15^th: Tara declares a 2 for 1 STOCK SPLIT for Common Stock
5. Mar 15^th: Tara DECLARES a 10% Common Stock Dividend, Record Date March 25^th, Payable April 1^st. The stock is valued at $12 per share.
6. April 1^st: Paid the Stock Dividend

Required:

1. Record entries a-f in the Journal and update the Stockholder’s Equity Balances
2. Prepare the Stockholder’s Equity Section at Dec 31^st 2020. Assume Tara reported Net Income of $750,000 for 2020.

Answer 1

1.

No.	Date	General Journal	Debit	Credit
a.	Jan. 1	Retained earnings	1750000
		Preferred dividends payable (5% x $10000000)		500000
		Common dividends payable (500000 x $2.50)		1250000
		(To record declaration of dividends)
	Jan. 15	No journal entry required
b.	Jan. 30	Preferred dividends payable	500000
		Common dividends payable	1250000
		Cash		1750000
		(To record the payment of dividends)
c.	Feb. 1	Cash (50000 x $10)	500000
		Common stock (50000 x $4)		200000
		Paid in capital in excess of par, common		300000
		(To record the issuance of common stock)
d.	Feb. 15	No journal entry required*
e.	Mar. 15	Retained earnings (110000 x $12)	1320000
		Common stock dividend distributable (110000 x $2)**		220000
		Paid in capital in excess of par, common		1100000
		(To record declaration of common stock dividend)
	Mar. 25	No journal entry required
f.	Apr. 1	Common stock dividend distributable	220000
		Common stock		220000
		(To record distribution of common stock dividend)

*Only a memo entry is recorded for a stock split for increasing the number of shares and reducing the par value of each share without affecting the total equity.

Number of common shares after stock split = (500000 + 50000) x 2 = 550000 x 2 = 1100000

Par value of common stock = $4/2 = $2

**Number of common shares issued as stock dividend = 10% x 1100000 = 110000

2.

Tara's Treasures
The Stockholder’s Equity Section Dec 31st 2020
Preferred Stock 5%, $100 Par 250,000 shares Authorized, 100,000 Shares Issued	10000000
Common Stock, $2 Par, 1,500,000 Shares Authorized 1,210,000 Shares Issued & Outstanding	2420000
Paid in Capital in Excess of Par, Common	4400000
Retained Earnings*	2180000
Total stockholders' equity $	19000000

*Retained earnings = $4500000 + $750000 - $1750000 - $1320000 = $2180000