Question

At the beginning of 2018, Thompson Service, Inc., showed the following amounts in the stockholders’ equity section of its balance sheet. Stockholders' equity: Capital stock, $1 par value, 500,000 shares authorized, 382,000 issued and outstanding $ 382,000 Additional paid-in capital: capital stock 4,202,000 Total paid-in capital $ 4,584,000 Retained earnings 2,704,600 Total stockholders' equity $ 7,288,600 The transactions relating to stockholders’ equity during the year are as follows. Jan. 3 Declared a dividend of $1 per share to stockholders of record on January 31, payable on February 15. Feb. 15 Paid the cash dividend declared on January 3. Apr. 12 The corporation purchased 6,000 shares of its own capital stock at a price of $40 per share. May 9 Reissued 4,000 shares of the treasury stock at a price of $44 per share. June 1 Declared a 5 percent stock dividend to stockholders of record at June 15, to be distributed on June 30. The market price of the stock at June 1 was $42 per share. (The 2,000 shares remaining in the treasury do not participate in the stock dividend.) June 30 Distributed the stock dividend declared on June 1. Aug. 4 Reissued 600 of the 2,000 remaining shares of treasury stock at a price of $37 per share. Dec. 31 The Income Summary account, showing net income for the year of $1,928,000, was closed into the Retained Earnings account. Dec. 31 The $382,000 balance in the Dividends account was closed into the Retained Earnings account. Required: a. Prepare in general journal form the entries to record the above transactions. b. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018. 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 December 31, 2018, without impairing the paid-in capital of Thompson Service. (Hint: The availability of retained earnings for dividends is restricted by the cost of treasury stock owned.)

Answer 1

		Journal Entries
a	Date	Account Title	Debit-$	Credit-$
	3-Jan	Dividends	$382,000
		Dividends Payable		$382,000
		to record declaration of cash dividends-$1 *382000
	15-Feb	Dividends Payable	$382,000
		Cash		$382,000
		to record payments of dividends
	12-Apr	Treasury Shares	240000
		Cash		240000
		to record purchases of 6000 shares at $40 each
	9-May	Cash	176000
		Treasury Shares		176000
		Share Premium
		to record reissue of 4000 shares @ 44 each
	1-Jun	Retained Earnings	798000			WN
		Stock Dividend		19000		Calculation of Stock Dividend
		Additional paid in capital-stock dividends		779000		RE	380000 shares *$42 *5/100
		to record the declaration of dividends					$798,000
	30-Jun	Stock dividend	19000			Stock dividend to be distributed	380000 shares *$1 *5/100
		Common Stock		19000			$19,000
		to record the distribution of dividend shares				Additional	380000 shares *41(42-1)*5/100
	4-Aug	Cash	22200				$779,000
		Dividend	1800
		Treasury Shares		24000
		to record reissue of 600 shares @ 37 /share
	31-Dec	Income Summary	1928000
		Retained Earnings		1928000
		to record transfer to income summary to retained earnings
	31-Dec	Retained Earnings	382000
		Dividends		382000
		to record adjust the dividends from RE
b	The following table shows the stockholders equity section of Balance Sheet
	Stock Holders Equity	Amount
	Capital Stock $1 par value ,500000 shares authorized 401000 shares issued and outstanding	401000
	Additional Paid in Capital -Capital Stock	4202000
	Stock Dividend	779000
	Treasury share premium	14200
	Retained Earnings	3452600
		8848800
	Less Treasury stock (1400*$40 each )	56000
	Total stockholders Equity	8904800
	Statement of retained Earnings
	Opening Balance	2704600
	Add Net Income	1928000
		4632600
	Less stock dividend to be distributed	798000
	Cash Dividend	382000
	Retained Earnings	3452600						s
c	The following table shows the calculation of maximum cash dividend per share
	Particulars	Amount
	Retained Earnings	3452600
	Less Treasury stock	56000
	Earnings available for distribution	3396600
	No of Shares (401000-1400)	399600
	Maximum cash dividend	Earnings available for distribution /No of shares
		$3396600/399600
		$8.50