Question

Redlands, Inc. began business on January 1, 2013. The firm initially capitalized its operations by issuing 12 shares of common stock with a $1 par value at $8 per share.

On July 1, 2013, Redlands issued a $100, ten-year, term bond. Redlands received only $80 in cash by issuing the bond because the stated rate of interest on the bonds was 8%, but the market rate of interest was more than 8% on July 1, 2013. The bond contract requires Redlands to pay interest every June 30, starting on June 30, 2014.

Redlands repurchased 2 shares of its own stock on December 1, 2013 and placed it in the treasury. The stock traded at $9 per share on December 1, 2013.

            Redlands declared a 10% dividend on common stock on December 20, 2013 and paid the dividend in cash on December 30, 2013.

            Redlands earned $20 net income in 2013.

Required:

1. Record the following journal entries for 2013:
   1. Issue of common stock on January 1.
   2. Issue of the term bond on July 1.
   3. Acquisition of treasury stock on December 1.
   4. Declaration of dividends on December 20.
   5. Payment of dividends on December 30.
   6. Adjusting entry to record the interest on bonds payable on December 31.

2. Post the above journal entries to T-accounts.

3. Report current and long-term liabilities pertaining to bonds payable on Redlands’ December 31, 2013 balance sheet.

4. Report the shareholders’ equity section on Redlands’ December 31, 2013 balance sheet.

Answer 1

a) journal for issue of common stock

Bank. 96

Equity share capital. 12

Securities premium reserve. 84

( Being stock issued)

b) journal for issue of term bond

Cash. 80

8%bond. 80

( Being bond issued)

C) acquisition of treasury stock

Equity share capital. 2

Securities premium reserve. 16

Treasury bond. 18

( Being treasury stock issued)

d) journal for declaration of dividend

dividend.payable. 1.20

Dividend recievable. 0.20

Equity shareholders. 1.00

( Being dividend declared )