Question

Accounting for Shareholders’ Equity Transactions

The shareholders’ equity section of the balance sheet of The Claremont Company appeared as follows at the end of the first year of operations:

Common stock, $0.1 par value	$600,000
Additional paid-in-capital	89,400,000
Retained earnings	32,000,000
Treasury stock	(7,500,000)
Shareholders’ equity	$114,500,000

During the second year of operations, the following transactions occurred:

1. Generated net income of $6 million.
   
2. Paid a cash dividend of $1.5 million.
   
3. Purchased 100,000 shares of common stock at $9.5 per share.
   
4. Executed a 1-for-2 reverse stock split.

Prepare the shareholders’ equity section of the balance sheet of Claremont Company at the end of the second year of operations.

Use a negative sign with treasury stock answer.

The Claremont Company Stockholders’ Equity December 31, Year 2
Common stock, par value	$
Additional paid-in-capital
Retained earnings
Treasury stock
Total shareholders’ equity	$

The Claremont Company Stockholders' Equity December 31, Year 2 Common stock, par value $6,000,000 Additional paid-in-capital 1,500,000 Retained earnings 1,500,000 950,000 Treasury stock 9,120,000 Total shareholders' equity

Answer 1

The Claremont Company
Stockholders' Equity
December 31, Year 2
Common stock, par value	$600,000
Additional paid-in-capital	$89,400,000
Retained earnings                     [Refer working note 1]	$36,500,000
Treasury stock                          [$7,500,000 + (100,000 shares x $9.5)]	-$8,450,000
Total shareholders’ equity	$118,050,000

.

.

Working note 1 - Calculation of balance of retained earnings at the end of year 2
Retained earnings at the beginning of year 2	$32,000,000
Add: Net Income for the Year 2	$6,000,000
	$38,000,000
Less: Dividends	$1,500,000
Retained earnings at the end of year 2	$36,500,000