Question

Sarah Co. has the following stockholders' equity for 12/31/2019: $ 25,000 1,400 26,400 Preferred stock, 8%, $50 par, 3,000 shares authorized, 500 shares issued and outstanding Common stock, $.20 par, 10,000 shares authorized, 7,000 shares issued, and 6,700 shares outstanding Total capital stock Additional paid-in capital: Preferred Common Total paid-in capital Retained earnings Treasury Stock (300 shares at $25 cost) Total stockholders' equity 208,600 235,000 280,000 (7,500 $ 507,500 Required: Record the transactions listed and prepare the 2020 stockholders' equity section of the balance sheet. The company reported NI of $90,000 for 2020. (a) Record the transactions listed. (1) Sold 100 shares of its treasury stock at $35 per share. The company uses the cost method. (2) Issued 300 shares of preferred stock for a patent. The stock was trading for $51 at the time of the exchange. (3) Declared and issued a 2:1 stock split on common stock when the common stock is selling at $40 per share.

Answer 1

Requirement a:

	Account title and explanation	Debit	Credit
1	Cash (100 x $35)	$3,500
	Treasury stock (100 x $25 cost)		$2,500
	Additional paid-in capital from treasury stock		$1,000
	[To record sale of treasury stock]
2	Patent (300 x $51)	$15,300
	Preferred stock (300 x $50 par)		$15,000
	Additional paid-in capital- preferred		$300
	[To record issuance of preferred stock for patent]
3	No Entry
4	Retained Earnings	$35,200
	Cash		$35,200
	[To record payment of cash dividends]

Note: No entry for stock split. At the time of stock split par value is come down to $0.10 and shares are doubled.

Requirement b:

Sarah Company
Stockholders' Equity
December 31,2020
Capital Stock:
Preferred stock	$40,000
Common stock (14,000* x $0.10 par)	$1,400
Total capital stock		$41,400
Additional paid-in capital:
Preferred	$300
Common	$208,600
From treasury stock	$1,000
Total additional paid-in capital		$209,900
Total Paid-in capital		$251,300
Retained Earnings		$334,800
(Less): Treasury stock (200 x $25 cost)		($5,000)
Total stockholders's Equity		$581,100

*Total issued common shares after stock-split is 7,000 x 2 = 14,000 shares.

Calculations:

Common dividends
Beginning outstanding common shares	6,700
Add: Sale of treasury stock	100
Total outstanding common shares before stock split	6,800
Stock-split	2:1
Total outstanding common shares after stock split	13,600
x Dividend per share	$2
Total Dividend	$27,200
Preferred dividends
Beginning preferred outstanding shares	500
New issue	300
Ending outstanding preferred shares	800
x dividend per shares	$10
Total preferred dividend	$8,000
Total cash dividends paid
Common dividend	$27,200
Preferred dividend	$8,000
Total	$35,200