Question

Required:

From the information given below, journalize the transactions, on the question paper in the space provided. (Descriptions are not required)

No	Details		Dr	Cr
9 Jan	Split the common stock 3 for 1 and reduce the par from $75 to $25 per share. After the split, there were 1 200 000 common shares outstanding.
28 Feb	Purchased 40 000 shares of the corporation’s own common stock as $20, recording the stock at cost.
1 May	Declared semiannual dividends of $0.80 on 75 000 shares of preferred stock and $0.12 on the common stock to stockholders of record on 1 June, payable on 10 June.
10 July	Paid the cash dividends.
7 Sept	Sold 30 000 shares of treasury stock at $34, receiving the cash.
1 Oct	Declare semiannual dividends of $0.80 on the preferred stock and $0.12 on the common stock (before the stock dividend). In addition, a 2% common stock dividend was declared on the common stock outstanding. The fair market value of the common stock is estimated at $36.
1 Dec	Paid the cash dividends and issued the certificates for the common stock dividend.

Answer 1

Journal entries
Date	Particulars	Debit amount	Credit amount
9-Jan	No journal entry
28-Feb	Treasury Stock	$800,000
	Cash		$800,000
	(Being treasury stock purchased at cost;40,000 shares @ $20 per share)
1-May	Retained earnings	$204,000
	Preferred dividend payable		$60,000
	Common dividend payable		$144,000
	(Being dividend on preferred shares and on common shares declared)
10-Jul	Preferred dividend payable	$60,000
	Common dividend payable	$144,000
	Cash		$204,000
	(Being cash dividends declared paid)
7-Sep	Cash	$1,360,000
	Treasury stock		$800,000
	Additional paid-in capital - Treasury stock		$560,000
	(Being treasury shares re-issued at more than cost,40,000 shares @$34 per share)
1-Oct	Retained earnings	$204,000
	Preferred dividend payable		$60,000
	Common dividend payable		$144,000
	(Being dividend on preferred shares and on common shares declared)
1-Oct	Retained earnings	$864,000
	Common stock dividend distributable		$600,000
	Additional paid-in capital - Common stock		$264,000
	(Being common stock dividend declared)
1-Dec	Preferred dividend payable	$60,000
	Common dividend payable	$144,000
	Cash		$204,000
	(Being cash dividends declared paid)
1-Dec	Common stock dividend distributable	$600,000
	Common stock		$600,000
	(Being stock dividend paid)

Working notes:

1. No journal entry is recorded for stock split since the total share capital remains same (par value is reduced in the same proportion as shares are split and issued). Only a memo entry is recorded to note the split.

2. Purchase of Company’s own shares, called buy back of shares, are called ‘treasury stock’ and recorded as treasury stock under equity section. Same are recorded at the price at which purchased.

3. Semi-annual dividend on preferred stock = $0.80 per share * 75,000 shares = $60,000. Semi-annual dividend on common stock = $0.12 per share * 12,00,000 shares = $144,000.

4. When treasury stock is sold again in the market at more than cost, the difference is recorded in ‘Additional paid-in capital – Treasury stock’ account. Cash received = 40,000 shares * $34 = $1,360,000. Treasury stock will be credited with purchase cost 40,000 shares * $20 = $800,000. Difference 40,000 shares*$14 = $560,000 is credited to APIC – Treasury stock.

5. Stock dividend = 12,00,000 shares * 2% = 24,000 shares. Market price = $36 per share, so retained earnings debited with 24,000 shares * $36 per share = $864,000. Par value of common stock = $25. So, common stock dividend distributable from common stock = 24,000 shares * $25 = $600,000. Difference 24,000 shares * $11 = $264,000 credited to additional paid in capital common stock.