Tony and Suzie purchased land costing $500,000 for a new camp in January 2017. N
ID: 2478970 • Letter: T
Question
Tony and Suzie purchased land costing $500,000 for a new camp in January 2017. Now they need money to build the cabins, dining facility, a ropes course, and an outdoor swimming pool. Tony and Suzie first checked with Summit Bank to see if they could borrow another million dollars, but unfortunately the bank turned them down as too risky. Undeterred, they promoted their idea to close friends they had made through the outdoor clinics and TEAM events. They decided to go ahead and sell shares of stock in the company to raise the additional funds for the camp. Great Adventures has two classes of stock authorized: 8%, $10 par preferred, and $1 par value common.
When the company began on July 1, 2015, Tony and Suzie each purchased 10,000 shares of $1 par value common stock at $1 per share. The following transactions affect stockholders’ equity during 2017, its third year of operations:
Jul. 2 - Issue an additional 100,000 shares of common stock for $9 per share.
Sep. 10 - Repurchase 10,000 shares of its own common stock (i.e., treasury stock) for $12 per share.
Nov. 15 Reissue 5,000 shares of treasury stock at $13 per share.
Dec. 1 Declare a cash dividend on its common stock of $115,000 ($1 per share) to all stockholders of record on December 15.
Dec. 31 Pay the cash dividend declared on Dec. 1.
Great Adventures has net income of $156,000 in 2017. Retained earnings at the beginning of 2017 was $146,000. Prepare the stockholders’ equity section of the balance sheet for Great Adventures as of December 31, 2017.
Explanation / Answer
Stockholder’s Equity
Common stock (120,000*1)
120,000
Additional paid in capital -common
800,000
Additional paid in capital – treasury stock
5,000
Total paid in capital
925,000
Add: Retained earnings
187,000
Total paid in capital & retained earnings
738,000
Less: Treasury stock
-60,000
Total stockholder’s equity
$678,000
Working notes
20,000*1 initial capital
Issued 100,000@9 out of which 100,000 @8 is paid in excess
Treasury stock purchased 10,000*12=120,000
Out of which reissued 5000 @13 so $1 is excess of par
Retained earnings = opening + net income – cash dividend
Stockholder’s Equity
Common stock (120,000*1)
120,000
Additional paid in capital -common
800,000
Additional paid in capital – treasury stock
5,000
Total paid in capital
925,000
Add: Retained earnings
187,000
Total paid in capital & retained earnings
738,000
Less: Treasury stock
-60,000
Total stockholder’s equity
$678,000