Question

The $40,000 common stock balance relates to the owner’s original investment of cash to start the company. Assume the stock has a par value of $4 per stock, how many shares of common stock was the owner originally issued?

The owner has decided to “take the company public” by issuing more stock to the public. The following transactions relating to the equity accounts occurred during the year ending March 31, 2017. Write the journal entries for the transactions below.

The company issued 20,000 shares of common stock for $12 a share.

The company issued 2,000 shares of 5% Preferred Stock at $100 par value.

The company purchased back 50 shares of its common stock for $10 a share. (Treasury Stock).

Dividends were declared for common stock holders in the amount of $2 per share. Remember to calculate the number of shares OUTSANDING (issued minus treasury).

The expected dividend for the preferred stock was declared.

The declared Dividends were paid from cash to both common and preferred stockholders.

Answer 1

Solution

Determination of the number of shares of common stock originally issued:

Value of common stock issued           $40,000

Par value of each share                       $4

Number of shares issued         $40,000/$4 = 10,000 shares

Journal entries to record transactions for the year ended March 31, 2017;

Account Titles and Explanation		Debit	Credit
Cash		$240,000
Common Stock			$80,000
Additional paid-in Capital - Common Stock			$160,000
(To record issue of common stock at $12 each, par - $4 per share and paid-in capital)
Cash		$200,000
5% Preferred Stock			$200,000
(To record issue of 2,000 preferred stock at $100 per share)
Treasury Stock		$500
Cash			$500
(To record purchase of 50 shares at $10 per share)
Dividends - Common Stock		$59,900
Dividends Payable			$59,900
(To record dividends declared at $2 per each outstanding share, shares outstanding - (10,000 + 20,000 - 50 = 29,950 shares x $2 = $59,900)
Dividends - Preferred Stock		$10,000
Dividends Payable - Preferred Stock			$10,000
(To record dividends declared on preferred stock - 5% of $200,000 = $10,000)
Dividends Payable - Common Stock		$59,900
Dividends Payable - Preferred Stock		$10,000
Cash			$69,900
(To record payment of cash towards dividends - common stock and preferred stock)

Note:

Computation of number of outstanding common shares for the purpose of dividends –

Shares originally issued           10,000

Shares issued in 2017              20,000

Less: Treasury stock                50

Number of shares outstanding            29,950