Question

The Equitee Corporation was incorporated on January 2, 2019, 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 3,000 preferred shares for a total of $60,000 cash, and 10,000 common shares for $15 per share.
2.		It issued 3,000 common shares in exchange for a parcel of land with an estimated fair market value of $60,000.
3.		The company had sales of $1,020,000 and incurred operating expenses of $900,000 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 November, 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 December 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 December, the cash dividends from November were paid.
7.		In December, 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 $20 per share.
8.		The company had sales of $1,200,000 and incurred $1,025,000 in operating expenses during the second year.

Prepare journal entries to record the above transactions, including closing entries for net income and dividends declared in transactions 3, 5, 7, and 8.

Answer 1

Transaction	Account title and explanation	Debit	Credit
1	Cash	$210,000
	Preferred stock		$60,000
	Common stock [10,000 x $15]		$150,000
	[Issuance of preferred and common stock]
2	Land	$60,000
	Common stock		$60,000
	[Acquisition of land in exchange of common shares]
3	Income summary [1,020,000-900,000]	$120,000
	Retained earnings		$120,000
	[Closing entry for net income
4	No entry
5	Cash Dividends	$70,000
	Dividends payable-preferred stock [9,000* arrears + 9,000* current]		$18,000
	Dividends payable-common stock [13,000 shares x $4]		$52,000
	[Declaration of dividends]
6	Dividends payable-preferred stock	$18,000
	Dividends payable-common stock	$52,000
	Cash		$70,000
	[Payment of cash dividends]
7	Stock dividends [13,000 x 10%] x $20	$26,000
	Stock dividend distributable		$26,000
	[Declaration of stock dividends]
8	Income summary [1,200,000-1,025,000]	$175,000
	Retained earnings		$175,000
	[Closing entry for net income]
	Retained earnings	$70,000
	Cash dividends Dividends		$70,000
	[Closing entry for cash dividends]
	Retained earnings	$2,600
	Stock dividends		$2,600
	[Closing entry for stock dividends]

*Preferred dividend = 3,000 shares x $3 = $9,000