Question

The TMI Corporation has been in operation for over 30 years and, at December 31, 2017, it had:

• 10,000 shares of $300 par-value common stock authorized, of which 4,000 shares had been issued, and

• 10,000 shares authorized, issued, and outstanding of $20 stated-value preferred stock, that pays a dividend of 4%.

On January 2, 2018, TMI’s Board of Directors declared and issued a 3-for-1 common stock split. Then, on September 1, 2018, TMI’s Board declared (i) a 20% (small) common stock dividend to holders of record on October 1, to be distributed on November 1, and (ii) the preferred stock dividend.

The company’s accounts also showed the following balances on August 31, 2018, before the declaration of the dividends: Additional contributed capital . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000

Retained earnings (includes all net income earned through August 31) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000

When distributed in November, the stock dividend included 6,000 fractional share rights, representing 600 potential shares. On December 15, 90% of the rights were exercised; the remaining rights will not be exercised until 2019.

On December 20, 2018, TMI acquired 2,000 shares of its own common stock at the current market value.

On December 30, 2018, TMI established a $206,000 sinking fund, with an equivalent reserve in stockholders’ equity.

The company had additional net income of $114,000 for the period September 1 through December 31, 2018.

After the stock split, the market value of TMI’s common stock throughout 2018 was $96 per share. Using the information above, prepare a statement of stockholders’ equity of The TMI Corporation at December 31, 2018, providing full disclosure.

In order to provide the necessary disclosures in the statement of stockholders’ equity, it will be necessary to consider the information relating to the stock split and the stock dividend. However, do not provide any supporting journal entries for those transactions.

Answer 1

Answer :

TMI Corporation

Statement of Stockholder's Equity

For the year ended December 31.2018

	Common stock	Perferred Stock	Paid in capital in excess of par	Retained earnings	TR Easury stock	Total stockholder's equity
Opening Balance on Jan 1.2018	1,200,000.00	200,000.00	90,000.00	-	-	1,490,000.00
Net income	-	-	-	714,000.00	-	714,000.00
Dividend declared on common stock	234,000.00	-	-	(230,400.00)	-	3,600.00
Dividend declared on preferred stock	-	-	-	(8,000.00)	-	(8,000.00)
Common stock repurchased	(200,000.00	-	-	8,0000.00	-	(192,000.00)
Additional paid in capital on stock dividned	-	-	-	(9,600.00)	-	(9,600.00)
Reserve for sinking fund	-	-	-	206,000.00	-	206,000.00
	1,234,000.00	200,000.00	90,000.00	680,000.00	-	2,204,000.00

Disclosures :

1. The stock split of 3 for 1 has resulted in the common stock of 12000(4000*3)@ par value of $100($300/3).
2. Preferred stock carries a Fixed dividend charge @4%
3. Out of 600 potential shares (Based on Fractional share warrants), only 90 exercise their right as at year- end December 31.2018
4. Common stock was bought back @ Market value which is $96 so the equivalent gain has been recorded in retained earnings (100 - 96)*2000 = $8000
5. Sinking fund has a Dual effect on both assets and stockholder's equity and as a result, x the same has been accounted
6. Since opening net income is neither given nor can be traced whole of net income is assumed to have been earned through 2018