Question

Tarrant Corporation was organized this year to operate a financial consulting business. The charter authorized the following stock: common stock, $19 par value, 12,700 shares authorized. During the year, the following selected transactions were completed: a. Sold 6,700 shares of common stock for cash at $38 per share. b. Sold 2,900 shares of common stock for cash at $43 per share. c. At year-end, the accounts reflected income of $6,000. No dividends were declared.Required:1. Prepare the journal entries required to record the sale of common stock in (a) and (b).2. Prepare the stockholders’ equity section as it should be reported on the year-end balance sheet.

Answer 1

Tarrant Corporation:

1. Journal Entries to record the sale of common stock:

a. Debit Cash Account with $254,600

Credit Common Stock with $127,300

Credit Share Premium with $127,300

To record the sale of 6,700 common stock $19 par at $38 per share

b. Debit Cash Account with $124,700

Credit Common Stock with $55,100

Credit Share Premium with $69,600

To record the sale of 2,900 common stock $19 par at $43 per share

2. Stockholders' Equity Section:

Common Stock:

Authorized shares 12,700 par $19 - $0

Issued Share Capital 9,600 par $19 - $182,400

Share Premium $196,900

Retained Earnings $6,000

Total - $385,300

Step-by-step explanation:

a) The authorized common stock or share capital is the total number of shares the corporation is legally permitted to issue. This is given as 12,700 at a unit price of $19, otherwise called the par value. This is stated in the Equity section as a memorandum record. It does not form part of the calculations for shareholders' equity.

b) When 6,700 shares were issued for $38, the element that is based on the par value is taken to Common Stock Account, while the remaining $19 ($38 - 19) is credited to the Share Premium Account.

c) 2,900 shares were additionally issued for $43 each. The element based on the par value is credited to the Common Stock Account, while the remaining $24 $(43 - 19) is credited to the Share Premium Account.

d) The Share Premium is the excess by which shares are issued above their par value. The par value is the nominal value of shares. Shares can be issued above, at, or below their par values. Issuing issues below par is not normal.

e) Since the income of $6,000 was reflected in the accounts, and dividends were not declared, this amount is taken as the Retained Earnings and reflected in the equity section as indicated above.

Answer 2

Dr Cash $254,600

Cr Common stock $127,300.00

Cr Paid-in capital in excess of par value $127,300.00

Dr Cash $124,700.00

Cr Common stock $55,100.00

Cr Paid-in capital in excess of par value $69,600.00

Equity section

Common stock $19 par.12,700 authorised,9600 issued $ 182,400.00

Paid in capital in excess of par $ 196,900.00

Total paid-in capital $ 379,300.00

Retained earnings $6,000.00

Total shareholders' equity $ 385,300.00

Step-by-step explanation:

The total cash realized from issuing 6700 shares =$38**6700=$ 254,600.00

The entries necessary would be a debit of $ 254,600.00 to cash account and the credit of $ 127,300.00 ($19*6700) into common stock and the balance of $127,300 ($254600.00-$ 127,300.00) into paid-in capital in excess of par value.

The total cash realized from issuing 2900 shares =$43**2900=$ 124,700.00

The entries necessary would be a debit of $ 124,700.00 to cash account and the credit of $ 55,100.00 ($19*2900) into common stock and the balance of $ 69,600.00 ($124,700-$55,100.00) into paid-in capital in excess of par value.