Question

The following shareholders' equity accounts are reported by Pharoah Inc. on January 1: 

Common shares (unlimited authorized, 142,500 issued) $2,280,000 

Preferred shares ($4 cumulative, convertible, 100,000 authorized, 4,500 issued) 337,500 

Contributed surplus-reacquisition of common shares 29,000 

Retained earnings 1,255,000 

The following selected transactions occurred during the year: 

Feb. 11 Issued 47,500 common shares at $20 per share.

Mar. 2 Reacquired 19,000 common shares at $22 per share. 

June 14 Split the common shares 2 for 1 when the common shares were trading at $30 per share. 

July 25 Reacquired 330 preferred shares at $70 per share. 

Sept. 16 Reacquired 47,500 common shares for $17 per share. 

Oct. 27 Declared a 5% common stock dividend distributable on December 13 to shareholders of record on November 24. The fair value of the common shares on October 27 was $19 per share. Distributed the stock dividend declared on October 27. The fair value of the common shares on December 13 was $21 

Dec. 13 per share.

Answer 1

First of all, we have to record the journal entries

Requirement 1. Prepare journal entries for the transactions.

Date	Account Titles and Explanation	Debit	Credit
Feb 11	Cash (47,500 * $20)	$950,000
	Common Stock		$950,000
	(Issued common shares for cash)
Mar 2	Common Shares (19,000 * $17)	$323,000
	Contributed Surplus - Reaquistion of Common shares (given)	$29,000
	Retained Earnings {418,000 - (323,000 + 29,000)}	$66,000
	Cash  (19,000 * $22)		$418,000
	(To record reacquistion of Common shares)
July 25	Preferred Shares (330 * $75)	$24,750
	Cash (330 * $70)		$23,100
	Contributed Surplus - Reaquistion of Common shares (24,750 - $23,100)		$1,650
	(337,500 / 4,500) = $75
	(To record reacquistion of Preferred shares)
Sep 16	Common Shares (47,500 * $8.5)	$403,750
	Retained Earnings	$403,750
	Cash (47,500 * $17)		$807,500
	(To record reacquistion of Common shares)
Oct 27	Stock Dividend (294,500 * 5% * $19)	$279,775
	Stock Dividend Distributable		$279,775
	(To record declaration of dividend)
Dec 13	Stock Dividend Distributable	$279,775
	Common Shares		$279,775
	(To record distribution of dividend)

Calculation of Cost of Common Shares

Date	Number of Shares	Total Cost	Working	Average Cost
Jan 1	142,500	$2,280,000	(2,280,000 / 142,500)	$16
Feb 11	47,500	$950,000
Balance	190,000	$3,230,000	(3,230,000 / 190,000)	$17
Mar 2	(19,000)	($323,000)		$17
Balance	171,000	$2,907,000	(2,907,000 / 171,000)	$17
June 14	171,000 (Split)
Balance	342,000	$2,907,000	(2,907,000 / 342,000)	$8.5
Sep 16	(47,500)	($403,750)	(403,750 / 47,500)	$8.5
Balance	294,500	$2,503,250
Oct 27	14,725	$279,775	(294,500 * 5%)	$19
Total	309,225	$2,783,025

Requirement 2. Show how each class of shares will be presented in the shareholders’ equity section of the balance sheet at December 31.

	Amount
Shareholder's Equity Share Capital:
Common Shares: Authorized - Unlimited 309,225 shares issued	$2,783,025
Preferred Shares: Authorized 100,000 , 4,170 shares issued	$312,750
(4,500 - 330) = 4,170

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