Question

Accounting for Stockholders' Equity

A condensed balance sheet for Sharp Tax Inc. as of Dec 31,2012, Follows. Capital stock authorized consists of 750 shares of 8%, 100 par, Cumulative stock and 15,000 shares of $50 par common stock.

Information relating to operations of the succeeding three years follows the condensed balance sheet.

Sharps Tax Inc.

Condensed Balance Sheet

Dec. 31, 2012

Assets Liabilities and Stockholders' Equity

Assets.....$525,000 Liabilities ............................................... $120,000

8% preferred stock, $100 Par.................75,000

Common Stock,$50 par.......................... 150,000

Paid in Capital in excess of Par- common 30,000

Retained Earnings.....................................150,000

Total Assets... $525,000 Total liabilities and stockholders' Equity $525,000

2013 2014 2015

Dividends declared on Dec, 20 payable

on January 10 of the following Year

Preferred stock ............................................8% cash 8% cash 8% cash

Common Stock..........................................$1.00 Cash $1.25 Cash $1.00 Cash

50% Stock

Net Income for year $67,500 $39,000 $51,000

2014

Feb. 12 Accumulated depreciation was reduced by $72,000 following an income tax investigation (Assume that this was an error that qualified as a prior- period adjustment) Additional income tax of $22,500 for the prior year was paid.

Mar. 3 Purchased 300 shares of common stock at $54 per share; treasury stock is recorded at cost, and retained earnings are appropriated equal to such costs.

2015

Aug. 10   All the treasury stock was resold at $59 per share, and the retained earnings appropriation was cancelled.

Sept.12  By vote of the stockholders, each share of the common stock was exchanged by the corporation for four shares of no-par common stock with a stated value of $15

Instructions:

1. Make the journal entries to record these these transactions for the three-year period ended December 31, 2015. (Assume that revenues and expenses were closed to a temporary account, Income Summary, at the end of each year. Use this account to complete the closing process.)

2. Prepare the Stockholders' Equity section of the balance sheet as it would appear at the end of 2013, 2014, and 2015.

Answer 1

(a)

Date	Particulars	Dr. Amount	Cr. Amount
2013
20-Dec	Dividends (Retained Earnings)…….dr	$84,000
	To Preferred Dividends payable(750*$8)		$6,000
	To Common Stock Dividends payable($3,000*$1)		$3,000
	To Stock Dividends Distributable - Common Stock(3000 shrs*$50*0.50)		$75,000
2014
10-Jan	Stock Dividends Distributable-Common Stock	$75,000
	To Common Stock ($50 par)		$75,000
	Preferred Dividends Payable……dr	$6,000
	Common Stock Dividends Payable…..dr	$3,000
	To Cash		$9,000
12-Feb	Accumulated Depreciation………..dr	$72,000
	To Retained Earnings		$72,000
	(Adjustment of accumulated depreciation from prior period caused by accounting error)
	Retained Earnings…………dr	$22,500
	To Cash		$22,500
	(Paid Additional income tax for prior years)
3-Mar	Treasury Stock (300 * $54)	$16,200
	To Cash		$16,200
	Retained Earnings……dr	$16,200
	To Retained earnings appropriated for purchase of treasury stock		$16,200
20-Dec	Dividends (Retained Earnings)…..dr	$11,250
	To Preferred Dividends Payable (750*$8)		$6,000
	To Common Dividends Payable (4,200 * $1.25)		$5,250
	Income Summary	$39,000
	To Retained Earnings		$39,000
2015
10-Jan	Preferred Dividends payable….dr	$6,000
	Common Dividends Payable…..dr	$5,250
	To Cash		$11,250
10-Aug	Cash a/c..(300 * $59)….dr	$17,700
	To Treasury stock		$16,250
	To Paid in capital from treasury stock		$1,500
Retained Earnings Appropriated for purchase of
	Treasury Stock……dr	$16,250
	To Retained Earnings		$16,250
12-Sep	Common Stock (18000*$15=$270,000 issued in exchange for 4,500 common shares * $50 = $225,000)	$225,000
	Paid in Capital in excess of par	$30,000
	Retained earnings	$15,000
	To Common Stock		$270,000
20-Dec	Dividends ( Retained Earnings)….dr	$24,000
	To Preferred Dividends Payable(750*$8)		$6,000
	To Common Dividends Payable(18000*$1)		$18,000
	Income Summary…..dr	$51,000
	To Retained Earnings		$51,000

	Stockholder's Equity Section of Balance Sheet
	Stockholder Equity section
	8% preferred stock	$75,000
	Common Stock	$270,000
	Additional Paid in Capital	$1,500
	Retained Earnings	$51,000
	Total Equity	397500