Question

Early in the year Bill Barnes and several friends organized a corporation called Barnes Communications, Inc. The corporation was authorized to issue 50,000 shares of $100 par value, 10% cumulative preferred stock and 400,000 shares of $2 par value common stock.  The following transactions (among others) occurred during the year:

Jan. 6    Issued for cash 20,000 shares of common stock at $14 per share. The shares were issued to Barnes and 10 other investors.  

Jan. 7    Issued an additional 500 shares of common stock to Barnes in exchange for his services in organizing the corporation.  The stockholders agreed that these services were worth $7,000.

Jan. 12 Issued 2,500 shares of preferred stock for cash of $250,000.

June 4  Acquired land as a building site in exchange for 15,000 shares of common stock.  In view of the appraised value of the land and the progress of the company, the directors agreed that the common stock was be valued for purposes of this transaction at $15 per share.

Nov. 15  The first annual dividend of $10 per share was declared on the preferred stock to be paid December 20.  

Dec. 20 Paid the cash dividend declared on November 15.

Dec. 31  After the financial statements were prepared, the net income for the year   was $147,200.

a. Prepare journal entries to record the above transactions.  

b. Prepare the stockholders’ equity section of the Barnes Communications, Inc. balance sheet at December 31, 2016.

Answer 1

Solution:-

a. Prepare journal entries to record the above transactions:-

General Journal
Date	Account title and explanation	Debit	Credit
Jan. 6	Cash	280,000
	Common Stock		40,000
	Additional Paid-in Capital: Common Stock		240,000
	(Issued 20,000 shares of $2 par value common stock )
Jan. 7	Organization Costs Expense	7,000
	Common Stock		1,000
	Additional Paid-in Capital: Common Stock		6,000
	(Issued 500 shares of common stock to Barnes in exchange for services relating to formation of the corporation. Implied issuance price ($7,000 ÷ 500 shares) = $14 per share.)
Jan. 12	Cash	250,000
	10% Cumulative Preferred Stock		250,000
	(Issued 2,500 shares of $100 par value, 10%, cumulative preferred stock at par value.)
June 4	Land	225,000
	Common Stock		30,000
	Additional Paid-in Capital: Common Stock		195,000
	(Issued 15,000 shares of common stock in exchange for land valued at $225,000 (15,000 shares x $15).)
Nov. 15	Dividends (Preferred Stock)	25,000
	Dividends Payable		25,000
	(To record declaration of annual dividends of $10 per share on 2,500 preferred shares outstanding.)
Dec. 20	Dividends Payable	25,000
	Cash		25,000
	(To record payment of dividend declared Nov. 15.)
Dec. 31	Income Summary	147,200
	Retained Earnings		147,200
	(To close the Income Summary account for the year.)
Dec. 21	Retained Earnings	25,000
	Dividends		25,000
	(To close the Dividends account.)

b. Prepare the stockholders’ equity section of the Barnes Communications, Inc. balance sheet at December 31, 2016:-

BARNES COMMUNICATIONS, INC.
Partial Balance Sheet
December 31, 2016
Stockholders' equity
10% cumulative preferred stock, $100 par, authorized
50,000 shares, issued and outstanding 2,500 shares	$         250,000
Common stock, $2 par, authorized 400,000 shares,
issued and outstanding 35,500 shares	71,000
Additional paid-in capital: Common stock	441,000
Total paid-in capital	$         762,000
Retained earnings*	122,200
Total stockholders' equity	$         884,200

*Computation of retained earnings at December 31, 2016
Retained earnings at January 1, 2016	$                  -
Add: Net income in 2016	147,200
Less: Preferred dividends in 2016	(25,000)
Retained earnings at December 31, 2016	$         122,200