Question

Early in 2014, Jones Industries was formed with authorization to issue 125,000 shares of $20 par value common stock and 15,000 shares of $100 par value cumulative preferred stock. During 2014, all the preferred stock was issued at par, and 90,000 shares of common stock were sold for $35 per share. The preferred stock is entitled to a dividend equal to 5 percent of its par value before any dividends are paid on the common stock. During its first five years of business (2014 through 2018), the company earned income totaling $3,850,000 and paid dividends of 55 cents per share each year on the common stock outstanding. On January 2, 2016, the company purchased 2,000 shares of its own common stock in the open market for $80,000. On January 2, 2018, it reissued 1,200 shares of this treasury stock for $60,000. The remaining 800 shares were still held in treasury at December 31, 2018. Required:

1. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018. Include a supporting schedule showing (1) your computation of any paid-in capital on treasury stock and (2) retained earnings at the balance sheet date. (Hint: Dividends are not paid on shares of stock held in treasury).

2. As of December 31, 2018, compute the company’s book value per share of common stock.

3. At December 31, 2018, shares of the company’s common stock were trading at $48. Explain what would have happened to the market price per share had the company split its stock 2-for-1 at this date. Also explain would have happened to the par value of the common stock and to the number of common shares outstanding.

1. Distinguish between paid-in capital and retained earnings of a corporation. Why is such a distinction useful? What are the major transactions and other financial activities that impact the amount of paid-in capital of a corporation? Identify for each major type of transaction or activity whether it increases or decreases the amount of paid-in-capital.

2. Describe the usual nature of the following features as the apply to a share of preferred stock: a. Cumulative b. Convertible

3. What is the purpose of a stock split?

4. What is treasury stock? Why do corporations purchase their own shares? Is treasury stock an asset? How should it be reported in the balance sheet?

Answer 1

1. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018. Include a supporting schedule showing (1) your computation of any paid-in capital on treasury stock and (2) retained earnings at the balance sheet date.
Year	Share Capital									Reatained Earnings
	Preferred stock			Common stock				Tresury Stock
	Number of shares	Amount	Dividend Paid	Number of shares	Face Value	Paid in capital in excess of par	Dividend Paid	Number of shares	Amount
Income earned in Five years										3850000
2014	15000	1500000	75000	90000	1800000	1350000	49500			-124500
2015			75000				49500			-124500
2016			75000	88000	1760000		48400	2000	80000	-123400
2017			75000				48400			-123400
2018			75000	89200	1784000	12000	49060	800	32000	-124060
Balance	15000	1500000		89200	1784000	1362000		800	32000	3230140

Stockholder's equity
15,000 Preferred stock of $100 each			1500000
90,000 common stock shares of $20 par			1800000
Paid in capital in excess of par			1350000
Paid in capital - Treasury			12000
Total Paid in capital			4662000
Retained earnings			3230140
Paid in capital and retained earnings			7892140
Less: Treasury stock (800 shares)			32000
Stockholder's equity			7860140

2. As of December 31, 2018, compute the company’s book value per share of common stock.

90,000 common stock shares of $20 par			1800000
Paid in capital in excess of par			1350000
Paid in capital - Treasury			12000
Total Paid in capital			3162000
Retained earnings			3230140
Paid in capital and retained earnings			6392140
Less: Treasury stock (800 shares)			32000
Stockholder's equity			6360140
Number of shares outstanding			89200
Book Value per share			71.30

3. At December 31, 2018, shares of the company’s common stock were trading at $48. Explain what would have happened to the market price per share had the company split its stock 2-for-1 at this date. Also explain would have happened to the par value of the common stock and to the number of common shares outstanding.

By split of company's share the number of shares will be doubled, hence the market price of share will reduced to half. Hence the share being quoted at $48, will decrease to $24 (approx.) after the spilit of shares.

Note: The other questions are not part of this question, hence these should be submitted separately.