Question

Identifying and Analyzing Financial Statement Effects of Stock Transactions 

The stockholders' equity of Verrecchia Company at December 31, 2011 , follows:

Common stock, $5 par value, 350,000 shares authorized; 120,000 shares issued and outstanding	$600,000
Paid-in capital in excess of par value	600,000
Retained earnings	346,000

During 2012, the following transactions occurred:

Jan. 5 Issued 10,000 shares of common stock for $ 12 cash per share.

Jan. 18 Purchased 4,000 shares of common stock for the treasury at $ 14 cash per share.

Mar. 12 Sold one-fourth of the treasury shares acquired January 18 for $ 17 cash per share.

July 17 Sold 500 shares of the remaining treasury stock for $ 13 cash per share.

Oct. 1 Issued 5,000 shares of 8 %, $ 22 par value preferred stock for $ 32 cash per share. This is the first issuance of preferred shares from the 50,000 authorized shares.

(a) Use the financial statement effects template to indicate the effects of each transaction.

Use negative signs with answers, when appropriate.

(b) Prepare the December 31, 2012, stockholders' equity section of the balance sheet assuming that the company reports net income of \(\$ 72,500\) for the year. Use a negative sign with your answer for treasury stock.

Answer 1

(a)

	Balance Sheet										Income Statement
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed	+	Earned		Revenue	-	Expenses	=	Net
							Capital		Capital						Income
Jan. 5	$    120,000.00	+	$          -	=	$              -	+	$ 120,000.00	+	$       -		$       -		$       -		$       -
Jan. 18	$     (56,000.00)	+	$          -	=	$              -	+	$ (56,000.00)	+	$       -		$       -		$       -		$       -
Mar. 12	$      17,000.00	+	$          -	=	$              -	+	$   17,000.00	+	$       -		$       -		$       -		$       -
July. 17	$        6,500.00	+	$          -	=	$              -	+	$     6,500.00	+	$       -		$       -		$       -		$       -
Oct. 1	$    160,000.00	+	$          -	=	$              -	+	$ 160,000.00	+	$       -		$       -		$       -		$       -

(b)

Stockholders' Equity
Paid-in capital
8% Preferred stock, $22 par value, 50,000 shares authorized, 5,000 shares issued and outstanding	$    110,000.00
Common stock, $5 par value, 350,000 shares authorized; 130,000 shares issued	$    650,000.00	$     760,000.00
Additional paid-in capital
Paid-in capital in excess of par value-preferred stock	$      50,000.00
Paid-in capital in excess of par value-common stock	$    620,000.00
Paid-in capital from treasury stock	$        2,500.00	$     672,500.00
Total paid-in capital		$ 1,432,500.00
Retained earnings		$     418,500.00
		$ 1,851,000.00
Less: Treasury stock (2,500 shares) at cost (use a negative sign with your answer)		$      (35,000.00)
Total Stockholders' Equity		$ 1,816,000.00