Question

Problem 12.6B At the beginning of 2013, Greene Limited showed the following amounts in the shareholders equity section of its statement of financial position: Red Tre: L06 Shareholders equity: Share capital, $1 par value, 1,000,000 shares authorized, 560,000 issued and outstanding... Share premium: share capital. Total issued and paid capital. Retained earnings........... . Total shareholders equity.. $ 560,000 4,480,000 $5,040,000 3.000.000 $8,040,000 The transactions relating to shareholders equity during the year are as follows: 5 Jan. Declared a dividend of S1 per share to shareholders of record on 31 January, payable on 18 February 18 Feb. Paid the cash dividend declared on 5 January. 20 Apr. The company purchased 1,000 of its own shares at a price of $10 per share, 25 May Reissued 500 of the treasury shares at a price of $12 per share 15 June Declared a 5 percent stock dividend to shareholders of record at 22 June, lo be distributed on 30 June. The market price of the share at 15 June was $ 11 per share. (The 500 shares remaining in the treasury do not participate in the stock dividend.) 30 June Distributed the stock dividend declared on 15 June. 12 Aug, Reissued 300) of the 500 remaining treasury shares at a price of $9.75 ber share. 31 Dec. The Income Summary account, showing profit for the year of $1,750,000, was closed into the Retained Earnings account. 31 Dec. The $560,000 balance in the Dividends account was closed into the Retained Earnings account. Instructions a. Prepare in general journal form the entries to record the above transactions. b. Prepare the shareholders equity section of the statement of financial position at 31 December 2013. Use the format illustrated in Exhibit 12-6. Include a supporting schedule showing your computation of retained earnings at that date. c. Compute the maximum cash dividend per share that legally could be declared at 31 December 2013 without impairing the paid capital of Greene Limited (Hint: The availability of retained earnings for dividends is restricted by the cost of treasury shares owned.)

Answer 1

(Amounts in $) 5,60,000 JOURNAL ENTRIES Jan.5 Cash dividends (5,60,000*1) Dividends payable (Declaration of dividend on common stock) 5,60,000 Feb.18 5,60,000 Dividends payable Cash (Payment of cash dividends) 5,60,000 Apr.20 10,000 Treasury stock (1000*10) Cash (Purchase of shares as treasury stock) 10,000 May-25 6,000 Cash (500*12) Treasury stock (500*10) Paid in capital from sale of treasury stock (Reissue of 500 of the treasury shares) 5,000 1,000 Jun.15 3,07,725 Stock dividends [(5,60,000-1,000+500) *5%*11] Stock dividends distributable (5,59,500*5%*1) Paid-in capital in excess of par value-Common stock (Declaration of stock dividend) 27,975 2,79,750

5,87,975 Balance sheet Shareholders' equity Common stock, $1 par value(10,00,000 shares authorized, 5,87,975 shares issued and outstanding Share premium : Share capital (44,80,000 + 2,79,750)| Treasury stock (1,000 - 125) Total issued and paid capital Retained earnings (30,00,000 - 5,60,000 - 3,07,725) 47,59,750 875 53,48,600 21,32,275 Total shareholders' equity 1,28,29,475 Maximum cash dividend per share that can be declared legally at 31/12/2013 Availability of retained earnings Cost of treasury shares owned 21,32,275 10,000 Retained earnings are restricted by the cost of treasury shares owned, hence maximum cash dividend per share = (21,32,275 - 10,000)/5,87,975 = $3.61 per share