ABC Corporations charter authorized 139000 shares of common stock, par $10. Duri
ID: 2500276 • Letter: A
Question
ABC Corporations charter authorized 139000 shares of common stock, par $10. During the first year, 20000 shares were sold and issued at $18 per share, in addition, 600 shares were subscribed for at the same price. One half of the subscription price was collected during the year. At the end of the first year, reported net income was $22000 and cash dividends of $6000 were declared and paid. At year end, liabilities amounted to $25000. On the last day of the year, 100 shares of stock were purchased from a disgruntled stockholder at $21 per share (assume cost method)
A) Provide the following year end amounts
1) Unissued capital stock
2) Legal Capital
3) Treaury Stock
4) Contributed Capital (total)
5) Total stockholders equity
B) Record the following transactions which occured the following year
1) 60 treasury shares are solf for $25 each
2) 40 treasury shares are sold for $16 each
3) a subscriber to 20 shares defaulted. The subscriber guaranteed the subscription price. The stock was sold for $17 per share.
Explanation / Answer
Given data,
Authorized Shares = 139000
Par Value = $10
Issued Shares = 20000
Issued Price = $18
Subscribed Shares = 600
Subscribed Price = $18
Net Income = $22000
Cash Dividends = $6000
Liabilities = $25000
Reacquired Shares = 100
Reacquired Price = $21
Answer to Part A:
Unissued Capital Stock = Authorized Capital Stock – Issued Capital Stock
= 139000 – 20000
= 119000
2. Legal Capital: It is the par value of common stock which cannot legally be allowed to leave the business i.e, it cannot be distributed as dividend.
Legal Capital = Par Value of outstanding Shares
= 500 * `10
= $5000
Outstanding Shares = Number of shares issued – Bought back shares
= 600 – 100
= 500
3. Treasury Stock: The Shares which were bought back by the company is called treasury Stock.
Treasury Stock = Number of shares bought back * Reacquired Price
= 100 *21
= $2100
4. Contributed Capital: Amount recognized under Equity head in balance sheet, which can be split into two: Common Stock and additional paid in capital
Common Equity = (Number of shares issued – Number of shares bought back) * par value
= (600 - 100) * 10
= 500 * 10
= $5000
Additional Paid in capital = Outstanding Shares * Excess of price over par value
= 500 * (18-10)
= 500 * 8
= $4000
Total Contributed Capital = Common Equity + Additional Paid in Capital
= $5000 + $4000
= $9000
5)Total Stockholders Equity:
Equity = $5000
Additional Paid in capital = $4000
Treasury Stock = $2100
Net Income = $22000
Cash Dividends = -$6000
Total Stockholders Equity = $27100
Answer to Part B:
1)60 Treasury Shares were sold for $25 each:
Cash a/c (60 * 25) Dr $1500
To Treasury Stock (60 * 21) $1260
To Additional Paid in Capital $240
2)40 Treasury Shares were sold for $16 each:
Cash a/c (40 * 16) Dr $640
Additional Paid in Capital Dr $200
To Treasury Stock (40 * 21) $840
3)Subscriber to 20 shares defaulted and stock was sold for $17 per share:
Cash a/c (20 * 17) Dr $340
To Common Stock (20 * 10) $200
To Additional Paid in Capital $140