Question

Homestead Oil Corp. was incorporated on January 1, 2019, and issued the following stock for cash:

• 850,000 shares of no-par common stock were authorized; 140,000 shares were issued on January 1, 2019, at $18.00 per share.
• 250,000 shares of $110 par value, 7.50% cumulative, preferred stock were authorized; 61,000 shares were issued on January 1, 2019, at $150 per share.
• Net income for the years ended December 31, 2019 and 2020 was $1,400,000 and $2,500,000, respectively.
• No dividends were declared or paid during 2019. However, on December 28, 2020, the board of directors of Homestead declared dividends of $1,680,000, payable on February 12, 2021, to holders of record as of January 19, 2021.

Required:
1. Use the horizontal model for the issuance of common stock and preferred stock on January 1, 2019. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

2. Use the horizontal model for the declaration of dividends on December 28, 2020. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

3. Use the horizontal model for the payment of dividends on February 12, 2021. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

Answer 1

1. Use the horizontal model for the issuance of common stock and preferred stock on January 1, 2019. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

Horizontal model for the issuance of common stock and preferred stock on January 1, 2019.

Balance Sheet						Income Statement
Assets	=	Liabilities	+	Stockholders’ Equity	←	Net Income	=	Revenues	−	Expenses
Cash                     + $11,670,000	=		+	Common stock             + $2,520,000	←		=		−
	=		+	Preferred stock            + $6,710,000	←		=		−
	=		+	Additional paid-in capital Preferred +$2,440,000	←		=		−

Working Notes:

Cash ((140,000 @ $18) + (61,000 @ $150)) = 10,020,000

Common Stock (140,000 shares @ $18 per share) = 2,520,000

Preferred Stock (61,000 shares @ $110 per share = 6,710,000

Additional Paid-In Capital-Preferred (61,000 @ $40) = 2,440,000

2. Use the horizontal model for the declaration of dividends on December 28, 2020. Indicate the financial statement effect.(Enter decreases with a minus sign to indicate a negative financial statement effect.)

Horizontal model for the declaration of dividends on December 28, 2020.

Balance Sheet						Income Statement
Assets	=	Liabilities	+	Stockholders’ Equity	←	Net Income	=	Revenues	−	Expenses
	=	Dividends payable +$1,680,000	+	Retained earnings         -$1,680,000	←		=		−

3. Use the horizontal model for the payment of dividends on February 12, 2021. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

Horizontal model for the payment of dividends on February 12, 2021.

Balance Sheet						Income Statement
Assets	=	Liabilities	+	Stockholders’ Equity	←	Net Income	=	Revenues	−	Expenses
Cash                       -$1,680,000	=	Dividends payable -$1,680,000	+		←		=		−