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

Answer

a. Prepare in general journal form the entries to record the above transactions Date Account Titles and Explanation Debit Credit Jan. 3 Dividends 382,000 Dividends Payable 382,000 To record declaration of a cash dividend of $1 per share on the 382,000 shares of capital stock outstanding. Payable Feb. 15 to stockholders of record on Jan. 31 Feb. 15 Dividends Payable 382,000 Cash 38,200 To record payment of $1 per share dividend declared Jan. 3 to stockholders of record on Jan. 31 Apr. 12 Treasury Stock Cash 240,000 240,000 Purchase of 6,000 shares of $1 par treasury stock at $40 per share. 9-May Cash 176,000 Treasury Stock 160,000 Addiional Paid-In Capital: Treasury Stock Sold 4,000 shares of treasury stock, which cost $160,000, ata price of $44 per share. 16,000 1-Jun Retained Earnings 810,600 Stock Dividend to Be Distributed 19,300 Additional Paid-In Capital: Stock Divends 791,300 Declared a 5% stock dividend consisting 19,300 shares (386,000 X 5%) of $1 par value capital stock, market price$42 per share. Distributable June 30 to stockholders of record on June 15. 30-Jun Stock Dividend to Be Distributed 19,300 Common Stock 19,300 Distributed 19,300-share stock dividend declared June 1 Aug. 4 Cash. 22,200 Treasury Stock... 24,000 Addiional Paid-In Capital: Treasury Stock Sold 600 shares of treasury stock, which cost $24,000, at a price 1,800 of $37 per share. Dec. 31 Income Summary 1,928,000 Retained Earnings 1,928,000 o close Income Summary account. Earnings Dec. 31 Retained 382,000 382,000 To close Dividends account.

b. Prepare the stockholders' equity section of the balance sheet at December 31, Stockholders' Equity Capital Stock $1 par value, 500,000 shares authorized $401,000 401,000 shares issued, of which 1,400 are in treasu Additional paid-in capital $4,202,000 From issuance of capital stock From stock dividend 779,000 From treasury stock 14,200 4,995,200 Total paid-in capital 5,396,200 Retained Earningst 3,452,600 $8,848,800 Less: Treasury stock, 1,400 shares at cost 56,000 Total Stockholders' equity 8,792,800 Computation of retained earnings at Dec. 31, 2018: $2,704,600 Retained earnings at beginning of year Add: Net income for vear 1,928,000 $4,632,600 Subtotal $382,000 Less: Cash dividend declared Jan. 3 Stock dividend declared June 1 798,000 1,180,000 Retained earnings, Dec. 31, 2018 3,452,600