Question

A company has the following transactions during the year related to stockholders’ equity.
February 1 Issues 5,600 shares of no-par common stock for $15 per share.
May 15 Issues 400 shares of $10 par value, 10.5% preferred stock for $12 per share.
October 1 Declares a cash dividend of $1.05 per share to all stockholders of record (both common and preferred) on October 15.
October 15 Date of record.
October 31 Pays the cash dividend declared on October 1.
Required:
1. Record each of these transactions.

Answer 1

Answer:

a- Cash/bank Dr  $84000

          common stock Cr  $84000

b- Cash/bank Dr $4800

            Preferred stock Cr  $4000

             paid-in capital Cr   $800.

c- Retained earnings  Dr $6300 ($1.05×6000)

                 Dividend Payable Cr   $6300

d- Dividend Payable  Dr $6300

                         Cash/Bank Cr  $6300

Explanation:

A- Common stock with no par value are stock issued without discount or premium so the total amount received is debited to cash/bank account and credited to common/equity stock account. The entry is as follows:

Cash/bank  $84000

          common stock  $84000

B- The issuance of preferred stock at a premium results in an entry for paid in capital which is the excess of par value. The entry is as follows;

Cash/bank $4800

            Preferred stock  $4000

             paid-in capital    $800.

C- Once a dividend is declared, the company becomes liable to pay which creates a liability until it's settled/paid off to shareholders. The entry is:

Retained earnings  $6300 ($1.05×6000)

                 Dividend Payable   $6300

D- Once we settle Payment of dividend we decrease our liability and decrease our cash/bank depending upon mode of payment. The entry is:

Dividend Payable  $6300

                         Cash/Bank  $6300

Answer 2

Answer:

1 February

Dr Cash                          84,000

Cr Common shares      84,000

(to record the issuance of 5,600 common share at $15 per share)

May 15th

Dr Cash                                                       4,800

Cr Preferred shares                                  4,000

Cr Paid-in capital - preferred shares        800

(to record issuance of 400 preferred shares at with par value at $10 and issuing price at $12)

October 1st

Dr Retained Earnings                                                              6,300

Cr Dividend Payable - Common and Preferred shares       6,300

(to record the dividend declaration paid to 6,000 preferred and common stocks outstanding).

Oct 15: No entries needed

October 31st

Dr Dividend Payable - Common and Preferred shares       6,300

Cr Cash                                                                                   6,300

(to record cash dividend payment)      

Explanation:

All entries has the explanation part below. Calculations are shown as below:

1 Feb: Because the stock has no par, Common stock account is recorded as much as the actual cash receipt: 5,600 x 15 = $84,000

May 15: Cash receipt is 400 x 12 = 4,800. Preferred shares account is credited at No of shares issued x par-value =400 x 10 =$4,000. The surplus of $800 due to issuing price is higher than par is credited into Paid-in capital account.

Oct 1st: Dividend payment obligations is calculated as 1.05 x shares outstanding = 1.05 x (5,600 + 400) = $6,300.