Question

41. Errors in Equity Transaction ransactions 102.3.5.6 d Industries had the following stockholders McLelland Industri equity balances: December 31 January 1 Preferred stock, 55 par value, 6,400 shares issued and outstanding $ 38,400 $32,000 Common stock, $1 par value, 28,200 and 28,000 shares issued, respectively 35,000 Additional paid-in capital 28,000 678,000 700,000 Retained earnings 80,600 77,000 Treasury stock, at cost, 1,720 and 2,000 shares, respectively (39,600) (48,000) When asked why the company's equity balances changed during the year, McLelland provided the following explanations: Preferred stock-The market value of the shares rose during the year from $5 to $6. The increase was placed in an Investment in Preferred Stock account. Common stock-The issuance of 200 shares for cash was recorded entirely in the account. Additional paid-in capital-Cash dividends paid during the year were subtracted from this account. Retained earnings-Net income of $12,000 was added to the account during the closing process. Also, the stock dividend taken from treasury stock (see below) was subtracted from the account. Treasury stock-A 1% common stock dividend (280 shares when the market price was $30) was recorded using only the retained earnings and treasury stock accounts. The dividend was declared and distributed on the same day, so one entry was made.

Answer 1

a. Incorrect entries:

	Accounts and Explanation	Debit	Credit
1	Investment in Preferred stock	6400
	Preferred stock		6400
	(To record increase in market value of preferred stock)
2	Cash	7000
	Common stock		7000
	(To record issuance of common stock)
3	Additional paid-in capital	22000
	Cash		22000
	(To record cash dividends paid)
4	Retained earnings	8400
	Treasury stock (280 x $30)		8400
	(To record stock dividend distributed)

b. Correct entries:

	Accounts and Explanation	Debit	Credit
1	Cash	7000
	Additional paid-in capital		6800
	Common stock (200 X $1)		200
	(To record issuance of common stock)
2	Retained earnings	22000
	Cash		22000
	(To record cash dividends paid)
3	Income summary	12000
	Retained earnings		12000
	(To close net income to retained earnings)
4	Retained earnings (280 x $30)	8400
	Common stock (280 x $1)		280
	Additional paid-in capital		8120
	(To record stock dividend declared and distributed)

Note: No journal entry is required for the increase in market value of preferred stock.

c.

Stockholders' Equity
December 31
Preferred stock, $5 par value, 6400 shares issued and outstanding	32000
Common stock, $1 par value, 28480 shares issued, 26760 shares outstanding	28480
Additional paid-in capital	714920
Retained earnings	58600
Treasury stock, at cost, 1720 shares	-48000
Total stockholders' equity	786000

Working:

Preferred stock, $5 par value, 6400 shares issued and outstanding	=6400*5
Common stock, $1 par value, 28480 shares issued, 26760 shares outstanding	=28000+200+280
Additional paid-in capital	=700000+6800+8120
Retained earnings	=77000-22000+12000-8400