Question

On January 2, 20X1, Apache Investment Company began business by issuing 8,000 shares at $12 at par value for $280,000 cash. The cash was invested, and on December 26, 20X1 all investments were sold for $307,000 cash. Operating expenses for 20X1 were $2,000 all paid in cash. Therefore, net income for 20X1 was $25,000.On December 27, the board of directors declared .35 per share cash dividend, payable on January 15, 20X2 to owners of record on December 31, 20X1. On January 30,20X2, the company bought and retired 7,000 of its own shares on the open market $28.00 each.

Requirements

1.Prepare journal entries for issuance of shares, declaration and payment of cash dividends, and retirement of shares.

2. Prepare a balance sheet as of December 31, 20X1

Answer 1

1) Journal Entries:

Date	Account Titles and Explanations	Debit	Credit
Jan. 2, 20X1	Cash	$280,000
	Common Stock (8,000 shares * $12 per share)		$96,000
	Paid-in Capital in Excess of Par ($280,000 - $96,000)		$184,000
	(To record the issue of common stock for cash)
Dec. 27, 20X1	Dividends (8,000 shares * $0.35 per share)	$2,800
	Dividends Payable		$2,800
	(To record the declaration of dividends)
Jan. 15, 20X2	Dividends Payable	$2,800
	Cash		$2,800
	(To record the payment of dividends)
Jan. 30, 20X2	Treasury Stock (7,000 shares * $28 per share)	$196,000
	Cash		$196,000
	(To record the retirement of 7,000 shares)

2)

Balance Sheet as on December 31, 20X1:

Apache Investment Company
Balance Sheet (Partial)
As on December 31, 20X1
Current Assets:
Cash	$305,000
Total Current Assets	$305,000
Total Assets	$305,000
Current Liabilities:	$0
Dividends Payable	$2,800
Total Liabilities	$2,800
Stockholders' Equity:
Common Stock	$96,000
Paid-in Capital in Excess of Par	$184,000
Total Paid in capital	$280,000
Retained Earnings	$22,200
Total Stockholders' Equity	$302,200
Total Liabilities and Paid-in Capital	$305,000

Working notes:

Cash Balance:

Working notes:
Cash from issue of common stock	$280,000
Less: Cash invested into the investments	($280,000)
Add: Sale of Investments	$307,000
Less: Operating expenses	($2,000)
Cash balance as on December 31, 20X1	$305,000

Retained Earnings:

Profit on sale of investments ($307,000 - $280,000)	$27,000
Less: Operating expenses	($2,000)
Net Income	$25,000
Less: Dividends	($2,800)
Retained Earnings	$22,200

Note: Payment of Dividends and retirement of shares are not considered because the balance sheet is prepared as on December 31, 20X1 but payment of dividends and retirement of shares are done in next year (Jan-20X2).