Question

North Wind Aviation received its charter during January authorizing the following capital stock: 

Preferred stock: 8 percent, par $10, authorized 20,000 shares. 

Common stock: par $1, authorized 50,000 shares. 

The following transactions occurred during the first year of operations in the order given:

 a. Issued a total of 40,000 shares of the common stock for $15 per share

 b. Issued 10,000 shares of the preferred stock at $16 per share.

 c. Issued 3,000 shares of the common stock at $20 per share and 1,000 shares of the preferred stock at $16.

 d. Net income for the first year was $48,000, but no dividends were declared.

 Required:

 Prepare the stockholders' equity section of the balance sheet at December 31. 

Answer 1

Stockholder’s Equity

Stockholder equity refers to the portion of the balance sheet which involves the capital ascertained from the public by issuing them stocks. It also depicts the equity stake on the books currently held by the equity investor of the firm. Thus, the value of the Stockholder’s equity is ascertained by subtracting total liabilities from the total assets.

Therefore, computation of the Stockholder’s equity section of the balance sheet for the year-end December 31 is shown below:

Stockholders’ Equity—December 31
Contributed Capital	Amount
Preferred Stock	$110,000
Add: Preferred shares, Additional Capital	$66,000
Common Stock	$43,000
Add: Common shares, Additional Capital	$617,000
Total capital contributed	$836,000
Add: Retained Earnings	$48,000
Total Stockholder equity	$884,000

Hence, it is ascertained that the total stockholder equity accounts for \(\$ 884,000\)

Preferred stock

Issued preferred stocks are 11,000 at \(\$ 16\) per share. The par value of the share is \(\$ 10\). The value of outstanding shares is \(\$ 110,000(11,000 \times \$ 10)\). The Additional paid in capital of preferred stock are \(\$ 66,000\) is as follows:

$$ \begin{aligned} \text { Additional paid in capital } &=[(\$ 16-\$ 10 \text { par }) \times 10,000]+[(\$ 16-\$ 10 \text { par }) \times 1,000] \\ &=(\$ 6 \times 10,000)+(\$ 6 \times 1,000) \\ &=\$ 66,000 \end{aligned} $$

Common stock

Issued Common stocks are 43,000 at \(\$ 15\) and \(\$ 20\) per share. The par value of the share is \(\$ 1\).

The value of outstanding shares accounts for \(\$ 43,000(43,000 \times \$ 1)\). Therefore the computation of the additional paid in capital of common stock are \(\$ 617,000\) is shown below:

$$ \begin{aligned} \text { Additional paid in capital } &=[(\$ 15-\$ 1 \text { par }) \times 40,000]+[(\$ 20-\$ 1 \text { par }) \times 3,000] \\ &=(\$ 14 \times 40,000)+(\$ 19 \times 3,000) \\ &=\$ 617,000 \end{aligned} $$