Question

Young the Giant Corp. was formed in 2018, with 10,000 shares of $100 par value, 5% cumulative, preferred stock and 500,000 shares of $1 par value common stock authorized. The company engaged in the following transactions.

2018:

• On January 2, 2018, the company issued 50,000 shares of common stock at a price of $30 per share.

• January 3, 2018, the company issued 5,000 shares of preferred stock for par value.

• The net loss for 2018 was $800,000. The company closed it out to retained earnings from income summary on December 31. (Prepare that entry.) No dividends were declared.

2019:

• The company repurchased 2,000 shares of common stock on November 25, 2019 at a cost of $35 per share. It is recorded using the cost method.

• The company generated net income during 2019 of $2,000,000. The company closed it out to retained earnings from income summary on December 31. (Prepare that entry.)

• On December 31, 2019, the company announced a total dividend of $150,000. The company records all dividends in one Dividends and one Dividends Payable account, but shows separate preferred and common dividends amounts in journal entry explanations. Required: Show all calculations.

a) Prepare journal entries in proper form for the 2018 and 2019 transactions above. Any calculations must be shown below the entries as part of the explanations.

b) Prepare the stockholders’ equity section of the balance sheet after the two years have passed, so as of December 31, 2019. This excerpt from the balance sheet must:

• Have a proper heading;

• Show all amounts in currency format with zero decimal places;

• Use proper single- and double-underlining;

• Show all categories of shares as part of each category of stock;

• Show par values and the preferred dividend rate, and

• Follow all general formalities.

Answer 1

A. Journal Entries

Date	Account	Dr/Cr	Amount	Calculation
02-Jan-18	Cash A/c	Dr	1,500,000
	Common Stock Account	Cr	50,000	50000*1
	Paid in capital account	Cr	1,450,000	50000*29
	To record issuance of 50,000 common stock at 30 per share
03-Jan-18	Cash A/c	Dr	500,000	5000*100
	Preferred Stock Account	Cr	500,000	5000*100
	To record issue of 5000 preferred stock at par
31-Dec-18	Retained Earing A/c	Dr	800,000
	Income Statement	Cr	800000
	To record transfer of income summary to retained earning
25-Nov-19	Treasury Stock Account	Dr	70,000	2000*35
	Cash A/c	Cr	70,000	2000*35
	To record purchase of 2000 shares at 35
31-Dec-19	Income Statement	Dr	2,000,000
	Retained Earing A/c	Cr	2,000,000
	To record transfer of income summary to retained earning
31-Dec-19	One Dividend A/c	Dr	150,000
	One Dividend Payable	Cr	150,000
	To record 50,000 dividend to Common stock (for 2018 & 2019) & 100,000 dividend for common shares
31-Dec-19	Retained Earning A/c	Dr	150,000
	One Dividend A/c	Cr	150,000
	To record one dividend transferred to retained earning

Note : The preferred stock is 5% cumulative which means preferred stock will be entiteld to dividend of earlier period if not declared hence in 2019 preferred stock will get divided for 2018 & 2019.

B. Balance Sheet Extract as on 31st Dec 2019

Liabilities	Amount	Basis of calculation
Authorised Capital
10,000 5% Cumulative Preferred Stock of 100	1,000,000.00	10000*100
500,000 Common Stock of Rs.1	500,000.00	500000*1
Paid Up Capital
5,000 5% Cumulative Preferred Stock of 100	500,000.00	5000*100
50,000 Common Stock of Rs.1	50,000.00	50000*1
Paid in capital account	1,450,000.00	50000*29
2,000 Treasury Stock	70,000.00	2000*35
Total Paid Up Capital	2,070,000.00
Retained Earning	1,050,000	(-800,000+2,000,000-150,000)
One Dividend Payable	150,000.00