Question

In: Accounting

A computer virus destroyed some of the financial information for Pasquale Company’s stockholders’ equity section. You...

A computer virus destroyed some of the financial information for Pasquale Company’s stockholders’ equity section. You have been asked to compute the missing account balances. The only information you can recover from the computer’s backup system is presented here:

December 31, 2016

December 31, 2017

Preferred stock

$3,000

$3,000

Common stock

8,000

a.???

Paid-in capital in excess of par, preferred stock

1,500

1,500

Paid-in-capital in excess of par, common stock

12,000

b.???

Paid-in capital, treasury stock

0

c.???

Retained earnings

18,200

7,400

Treasury stock

0

(7,000)

Total stockholders’ equity

42,700

d.????

During 2017, 7,000 shares of common stock with a par value of $1 were issued when the market price per share was $12.

Cash dividends of $25,000 were paid to preferred shareholders.

Pasquale Company acquired 3,000 shares of common stock at $14 to hold as treasury stock.

Pasquale Company reissued 2,500 shares of treasury stock for $16.

Calculate the account balances for:

Common Stock

Paid-In Capital in Excess of Par, Common Stock

Paid-In Capital, Treasury Stock

Stockholders’ Equity

How much net income did Pasquale Company report for 2017?

To solve these, it is helpful to put together the journal entries for the transactions a-d, then calculate the account balances and net income.

a.

b.

c.

d.

Balance of Common Stock:

Balance of Paid-In Capital in Excess of Par, Common Stock:

Balance of Paid-In Capital, Treasury Stock:

Balance of Stockholders’ Equity:

Net Income Reported in 2017:

Beginning Retained Earnings        

+ Net Income                                          

                                                                       

-Dividends                                               

= Ending Retained Earnings           

Solutions

Expert Solution

  • All working forms part of the answer
  • Journal Entries

Transaction no

Accounts title

Debit

Credit

a.

Cash

$                             84,000.00

Common Stock

$                 7,000.00

Paid in Capital in excess of par - common stock

$               77,000.00

(Common Stock issued at $12)

b.

Dividends

$                             25,000.00

Cash

$               25,000.00

(dividend paid to Pref Stock)

c.

Treasury Stock

$                             42,000.00

Cash

$               42,000.00

(shares re acquired)

d.

Cash

$                             40,000.00

Treasury Stock

$               35,000.00

Paid in Capital, Treasury Stock

$                 5,000.00

(shares re issued)

  • Working #1 Calculation of Net Income for 2017

Retained Earnings, Ending Balance [given]

$                          7,400.00

Add: Preferred Stock dividend

$                        25,000.00

Less: Retained earnings, Beginning balance

$                        18,200.00

Net Income earned during 2017

$                        14,200.00

Hence, Statement of Retained Earnings would look like this:

Statement of Retained Earnings

Beginning Balance

$                        18,200.00

Add: Net Income

$                        14,200.00

$                        32,400.00

Less: Dividends

$                        25,000.00

Ending Balance (matching with the balance given)

$                          7,400.00

  • Working #2, for calculation of Balances:

Transaction - Journal Entries + Net Income

Balances, as on Dec 31, 2016

a.

b.

c.

d.

Net Income 2017

Balances, as on Dec 31, 2017

[A]

[B]

[A + B]

Preferred Stock

$                        3,000.00

$         3,000.00

Common Stock

$                        8,000.00

$           7,000.00

$       15,000.00

Paid in Capital in excess of Par - Preferred Stock

$                        1,500.00

$         1,500.00

Paid in Capital in excess of Par - Common Stock

$                     12,000.00

$        77,000.00

$       89,000.00

Paid in Capital in excess of Par - Treasury Stock

$                                     -  

$       5,000.00

$         5,000.00

Retained Earnings

$                     18,200.00

$      (25,000.00)

$          14,200.00

$         7,400.00

Treasury Stock

$                                     -  

$      (42,000.00)

$    35,000.00

$       (7,000.00)

Total Stockholders' Equity

$                     42,700.00

$        84,000.00

$      (25,000.00)

$      (42,000.00)

$    40,000.00

$    113,900.00

  • Correct answers, based on above calculations:

Answer no.

Correct figure

a.

Balance of Common Stock:

$        15,000.00

b.

Balance of Paid-In Capital in Excess of Par, Common Stock:

$        89,000.00

c.

Balance of Paid-In Capital, Treasury Stock:

$           5,000.00

d.

Balance of Stockholders’ Equity:

$      113,900.00

Net Income = $ 14,200


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