Cosway Inc ( CI ) is a private firm. It is authorized to issue 100,000 preferred
ID: 2454035 • Letter: C
Question
Cosway Inc (CI) is a private firm. It is authorized to issue 100,000 preferred shares and an unlimited number of common shares. The preferred shares have an annual dividend entitlement of $10.
On January 1, 2015, CI reported the following Shareholders’ equity balances:
Preferred shares (10,000 shares issued) - $400,000
Common shares (750,000 shares issued) - $750,000
Retained earnings - $2,000,000
The following transactions occurred during fiscal 2015:
January 30 - Issued 10,000 preferred shares for $425,000
February 15 - Issued 2,000 preferred shares in exchange for equipment. The equipment was valued at $70,000.
June 8 – Issued 5,000 common shares for $55,000
June 30 – Declared the annual dividend to the preferred shareholders of $10 per share. Total dividends of $400,000 were declared to the common shareholders.
August 5 – The dividends declared in June were paid.
REQUIRED #1:
Prepare any journal entries necessary to record the above transactions.
REQUIRED #2:
Complete the following table by stating the correct balances for each item listed as of December 31, 2015 (after the journal entries from REQ #1 have been posted). Any supporting work such as T-accounts, calculations, etc should be provided below the table and referenced clearly to the table. Net income for 2015 was $500,000.
# of preferred shares authorized
# of preferred shares issued
Preferred share capital (in $)
# of common shares authorized
# of common shares issued
Common share capital (in $)
Retained earnings
# of preferred shares authorized
# of preferred shares issued
Preferred share capital (in $)
# of common shares authorized
# of common shares issued
Common share capital (in $)
Retained earnings
Explanation / Answer
Solution to Question # 1
January 30 - Issued 10,000 preferred shares for $425,000
In this case the face/par value of the preference shares is $ 40 ($4,00,000/10,000 Shares). Now on January 30 the preference shares are issued at Excess of par amount $ 42.5 per share ($4,25,000/10,000 Shares). Following is the entry for the same:
Debit ($)
Credit ($)
Cash / Bank A/c
$425,000
To Preference Stock Capital A/c
$400,000
To Paid in capital in excess of Par – Preferred Stock
$25,000
February 15 - Issued 2,000 preferred shares in exchange for equipment. The equipment was valued at $ 70,000.
The par value of preferred stock is $ 40 and if we go by this the paid up value of the 2000 preferred stock should be $ 80,000. Here in this case the preferred stock is exchanged at discount value of $70,000. The value of 2000 preferred should had been $ 80,000 so the discount of $10,000. Following is the entry for the same.
Debit ($)
Credit ($)
Equipment A/c
$70,000
Discount on preferred stock
$10,000
To Preferred Stock / Share Capital A/c
$80,000
June 8 – Issued 5,000 common shares for $55,000
Par value of the common stock is $1 per share ($750000/750000 shares). Now 5000 common shares are issued at $55,000 which is at the premium value. Following is the entry for the same.
Debit ($)
Credit ($)
Cash / Bank A/c
$55,000
To Common /Equity Stock Capital A/c
$5,000
To Paid in capital in excess of Par – Common Stock
$50,000
June 30 – Declared the annual dividend to the preferred shareholders of $10 per share. Total dividends of $400,000 were declared to the common shareholders.
When dividends are declared on June 30 following journal entries will be passed:
For Common Shareholders
Debit ($)
Credit ($)
Retained Earnings A/c
$400,000
To Common Share Dividends Payable A/c
$400,000
Dividend of $ 10 per share for 22,000 preferred shares (refer balances of preferred shares)
For Preferred Shareholders
Debit ($)
Credit ($)
Retained Earnings A/c
$220,000
To Preferred Share Dividends Payable A/c
$220,000
August 5 – The dividends declared in June were paid.
When Dividends are paid following is the entry:
For Common Shareholders
Debit ($)
Credit ($)
Common Share Dividends Payable A/c
$400,000
To Cash/Bank A/C
$400,000
For Preferred Shareholders
Debit ($)
Credit ($)
Preferred Share Dividends Payable A/c
$220,000
To Cash / Bank A/c
$220,000
Solution to Question # 2
# of shares issued
Preferred Shares balance as on Dec 31, 2015
No. Of shares
Opening Balance of Shares Preferred
10,000
Add:
10,000 issued on Jan 30
10,000
Add:
2,000 issued on Jan 30
2,000
Closing Balance of Preferred Shares as on 31 Dec 2015
22,000
Common Stock balance as on Dec 31, 2015
No. Of shares
Opening Balance of Shares Common
7,50,000
Add:
5,000 issued on Jun 8
5,000
Closing Balance of Preferred Shares as on 31 Dec 2015
7.55,000
# Share capital ($)
Preferred Shares balance as on Dec 31, 2015
No. Of shares
Amount $
Opening Balance of Shares Preferred
10,000
$400,000
Add:
10,000 issued on Jan 30
10,000
$400,000
Add:
2,000 issued on Jan 30
2,000
$80,000
Closing Balance of Preferred Shares as on 31 Dec 2015
22,000
880,000
Common Stock balance as on Dec 31, 2015
No. Of shares
Amount $
Opening Balance of Shares Common
750,000
750000
Add:
5,000 issued on Jun 8
5,000
5000
Closing Balance of Preferred Shares as on 31 Dec 2015
755,000
755,000
# of Share Authorized
Company is authorized to issue 100,000 preferred shares and an unlimited number of common shares
Retained Earnings balances as on Dec,31 2015
Retained Earnings Balances
Opening Balances
$2,000,000
Add:
Paid in capital in excess of par - Preferred stock on Jan 30
$25,000
Less:
Discount on the Preferred Share on Feb'15
$10,000
Add:
Paid in capital in excess of par - Common stock on Jan 30
$50,000
Less:
Dividends Declared ( Common + Preferred)
$620,000
Add:
Net Income during the year
$500,000
$1,945,000
Request you to please provide the feedback
Debit ($)
Credit ($)
Cash / Bank A/c
$425,000
To Preference Stock Capital A/c
$400,000
To Paid in capital in excess of Par – Preferred Stock
$25,000