(Dividends and Stockholders’ Equity Section) Focus Foot Company reported the fol
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Question
(Dividends and Stockholders’ Equity Section) Focus Foot Company reported the following amounts in the stockholders’ equity section of its December 31, 2013, balance sheet.
Preferred stock, 12%, $100 par (100,000 shares authorized, 25,000 shares issued) $2,500,000
Common stock, $1 par (1,000,000 shares authorized, 300,000 shares issued) 300,000
Additional paid-in capital 950,000
Retained earnings 1,365,000
Total $5,115,000
During 2014, Focus Foot took part in the following transactions concerning stockholders’ equity.
1. Paid the annual 2013 dividend on preferred stock and a $0.50 per share dividend on common stock. These dividends had been declared on December 31, 2013.
2. Purchased 1,000 shares of its own outstanding common stock for $8 per share. Focus Foot uses the cost method. 3. Reissued 1,000 treasury shares for land with an appraised value of $9,500. Focus Foot’s common shares were trading for $8.50 per share.
4. Issued 50,000 shares of common stock at $9 per share.
5. Declared and recorded a 2:1 stock split on the outstanding common stock when the stock is selling for $10 per share.
6. Declared the annual 2014 dividend on preferred stock and the $0.50 per share dividend on common stock. These dividends are payable in 2015. Instructions
(a) Prepare journal entries to record the transactions described above. (b) Prepare the December 31, 2014, stockholders’ equity section. Assume 2014 net income was $665,000
Please show all work. Do not just write the answers. Show how you got the numbers.
Explanation / Answer
Lets take a step by step approach to come at the equity section of the balance sheet
1. Paid $0.50 per share dividend on a common stock
There were 300,000 shares outstanding, so total dividends paid = 300,000 = 150,000
So this amount has to be added in additional paid in capital and as of now, remaining part of the net income has to be added in retained earnings
Dividends paid for preferred stock = 2500000 * 12% = 300,000
New Paid in capital = 950,000 + 150,000 + 300,000= 1,400,000
Retained Earnings = 1,365,000 + 215,000 = 1,580,000
Remaining totals would be same
2. Purchased 1000 shares for $8 per share. Since we are only bothered about the equity section, lets not focus on the cash paid for this transaction. So number of common shares will come down to 299,000 and total common stock holders equity would be 299,000
Since cash paid is $8 * 1000 = $8000, additional 7000 has t be adjusted in additional paid in capital
So Common equity = 299,000
Additional Paid in capital = 1,400,000 - 7000 = 1,393,000
3. Issues treasury shares. This transaction wont have any effect on outstanding shares.
But the premium received has to be adjusted in additional paid in capital
So paid in capital = 1,393,000 + (9500 - 8500) = 1,394,000
4. Issues 50,000 shares for $9 per share
Total cash received = 50000 * 9 = 450,000
Since par value is $1, common equity outstanding will change by 50,000 and remaining will be adjusted in addiional paid in capital
Common Equity shares = 299,000 + 50000 = 349,000
Common equity outstanding = 299,000 + 50000 = 349,000
So paid in capital = 1,394,000 + 400,000 = 1,794,000
5. Common equity outstanding will increase and total equity outstanding will remain same
New shares outstanding would be 349,000 * 2 = 698,000
Total authorized shares are 2,000,000 and book value per share would be now $0.50, so total equity would remain same
6. Since the annual dividends are to be paid in 2015, this will not effect December 31 2014 balance sheet
So new equity section of the balance sheet would be as follows
Preferred Stock: 2,500,000
Common Stock: 349,000
Additional Paid in capital: 1,794,000
Retained Earnings:1,580,000
Total Equity: 6,223,000
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