The Equitee corporation was incorporated on Jan 2, 2015, with two classes of sha

Question

The Equitee corporation was incorporated on Jan 2, 2015, with two classes of share capital: an unlimited number of common shares and $3 cumulative non- voting preferred shares with an authorized limit of 50,000.

During the first year of operations, the following transactions occurred:

1. The company issued 3000 preferred shares for a total of $75000 cash, and 10000 common shares for $20 per share.

2. It issued 4000 common shares in exchange for a parcel of land with an estimated fair market value of $120000.

3. The company had sales of $1050000 and incurred operating expenses of $925,000 during the year

4. No dividends were declared during the first year of operations.

During the second year of operations, the following transactions occurred:

5. In Nov, the company's board of directors declared cash dividends sufficient to pay a dividend of $4 on each common share. The dividends were payable on Dec 14. (hint: remember that no dividends can be paid on the common shares until the dividends in arrears and the current dividends on the preferred shares are paid.

6. In Dec, the cash dividends from November were paid

7. In Dec, the board of directors declared and distributed a 10% stock dividend on the common shares. The estimated market value of the common shares at the time was $24 per share.

8. the company had sales of $1200000 and incurred $1025000 in operating expenses during the second year.

Required:

a. prepare journal entries to record the above transactions,, including closing entries for net income and dividends declared in transactions 3, 5, 7 and 8. Use a spreadsheet or table format like the one in the first practice problem to track the changes in all of the shareholders' equity accounts over the two year period. Prepare the share holders' equity section of the statement of financial position at the end of the second year.

b. Why would the owners have designated the preferred shares as non-voting?

Explanation / Answer

S.No Accounts Debit Credit 1 Cash       275,000 Share capital- Preferred shares          75,000 3000 shares Share capital- Common shares -       200,000 10000 shares 2 Land       120,000 Share capital- Common shares          80,000 4000 shares Paid in capital(excess to facevalue common stock)          40,000 3 Revenue    1,050,000 Income summary    1,050,000 Income summary       925,000 Expenses       925,000 Income summary       125,000 retained earnings       125,000 5 Retained earnings          18,000 Dividend- preferrence shares          18,000 (including arrear)-3000*3+3000*3 Retained earnings          56,000 Dividend- Common stock          56,000 14000*4 6 Dividend          74,000 cash          74,000 7 Retained earnings          28,000 Dividend- Common stock          28,000 280000*10% Dividend- Common stock          28,000 Cash          28,000 8 Revenue    1,200,000 Income summary    1,200,000 Income summary    1,025,000 Expenses    1,025,000 Income summary       175,000 retained earnings       175,000 Share holders Equity section Share capital Excess paidin capital Retained earnings Total 1st year           200,000                              40,000                       125,000     365,000 Balance at the end of 1st year           200,000                              40,000                       125,000     365,000 2nd Year - openings           200,000                              40,000                       125,000     365,000 Dividends                     (102,000) (102,000) income for the year                       175,000     175,000 Balance at the end of 2nd year           200,000                              40,000                       198,000     438,000

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