Question

Early in the year Bill Sharnes and several friends organized a corporation called Sharnes Communications, Inc. The corporation was authorized to issue 50,000 shares of $100 par value, 10 percent cumulative preferred stock, and 400,000 shares of $2 par value common stock. The following transactions (among others) occurred during the year:

Jan. 6 : Issued for cash 20,000 shares of common stock at $14 per share. The shares were issued to Sharnes and 10 other investors.
Jan. 7 : Issued an additional 500 shares of common stock to Sharnes in exchange for his services in organizing the corporation. The stockholders agreed that these services were worth $7,000.
Jan. 12 : Issued 2,500 shares of preferred stock for cash of $250,000.
June 4 : Acquired land as a building site in exchange for 15,000 shares of common stock. In view of the appraised value of the land and the progress of the company, the directors agreed that the common stock was to be valued for purposes of this transaction at $15 per share.
Nov. 15 : The first annual dividend of $10 per share was declared on the preferred stock to be paid on December 20.
Dec. 20 : Paid the cash dividend declared on November 15.
Dec. 31 : After the revenue and expenses were closed into the Income Summary account, that account indicated a net income of $147,200.

Prepare journal entries in general journal form to record the above transactions. Include entries at December 31 to close the Income Summary account and the Dividends account.

Answer 1

The journal entries for the given transactions for Sharnes Communications, Inc. are as follows: Cash (debit) and Common Stock (credit) for 20,000 shares issued on Jan. 6; Common Stock (debit) and Common Stock Dividend Distributable (credit) for 500 shares issued to Sharnes on Jan. 7; Cash (debit) and Preferred Stock (credit) for 2,500 shares issued on Jan. 12; Land (debit) and Common Stock (credit) for 15,000 shares exchanged on June 4; Preferred Dividends Payable (debit) and Preferred Dividends Distributable (credit) for the dividend declared on Nov. 15; Preferred Dividends Distributable (debit) and Cash (credit) for the paid dividend on Dec. 20; Income Summary (debit) and Retained Earnings (credit) for the net income on Dec. 31. The closing entries are Retained Earnings (debit) and Dividends (credit).

Step-by-step explanation:

To record the above transactions for Sharnes Communications, Inc., the following journal entries should be made:

Jan. 6:

Cash: Debit $280,000 (20,000 shares x $14 per share)

Common Stock: Credit $280,000 (20,000 shares x $14 per share)

Jan. 7:

Common Stock: Debit $7,000 (500 shares x $14 per share)

Common Stock Dividend Distributable: Credit $7,000 (500 shares x $14 per share)

Jan. 12:

Cash: Debit $250,000

Preferred Stock: Credit $250,000

June 4:

Land: Debit $225,000 (15,000 shares x $15 per share)

Common Stock: Credit $225,000 (15,000 shares x $15 per share)

Nov. 15:

Preferred Dividends Payable: Debit $100,000 (10,000 shares x $10 per share)

Preferred Dividends Distributable: Credit $100,000 (10,000 shares x $10 per share)

Dec. 20:

Preferred Dividends Distributable: Debit $100,000 (10,000 shares x $10 per share)

Cash: Credit $100,000 (10,000 shares x $10 per share)

Dec. 31:

Income Summary: Debit $147,200

Retained Earnings: Credit $147,200

Closing Entries:

Retained Earnings: Debit $147,200

Dividends: Credit $147,200