Question

The stockholders’ equity accounts of Indigo Corporation on January 1, 2017, were as follows.

Preferred Stock (7%, $100 par noncumulative, 10,000 shares authorized) $600,000
Common Stock ($4 stated value, 600,000 shares authorized) 2,000,000
Paid-in Capital in Excess of Par Value—Preferred Stock 30,000
Paid-in Capital in Excess of Stated Value—Common Stock 960,000
Retained Earnings 1,376,000
Treasury Stock (10,000 common shares) 80,000

During 2017, the corporation had the following transactions and events pertaining to its stockholders’ equity.

Feb. 1 Issued 10,000 shares of common stock for $60,000.
Mar. 20 Purchased 2,000 additional shares of common treasury stock at $7 per share.
Oct. 1 Declared a 7% cash dividend on preferred stock, payable November 1.
Nov. 1 Paid the dividend declared on October 1.
Dec. 1 Declared a $0.50 per share cash dividend to common stockholders of record on December 15, payable December 31, 2017.
Dec. 31 Determined that net income for the year was $550,000. Paid the dividend declared on December 1.

Journalize the transactions.

Answer 1

Indigo Corporation

Journal Entries:

Feb. 1:

Debit Cash Account with $60,000

Credit Common Stock with $40,000

Credit Additional Paid-in Capital with $20,000

To record the issue of 10,000 shares of common stock, par $4 at $6 each.

March 20:

Debit Treasury Stock with $8,000

Debit Additional Paid-in Capital with $6,000

Credit Cash Account with $14,000

To record the repurchase of 2,000 shares of treasury stock at $7 each.

October 1:

Debit Dividends - Preferred Stock with $35,000

Credit Dividends Payable with $35,000

To record preferred stock dividends declared.

November 1:

Debit Dividends Payable with $35,000

Credit Cash Account with $35,000

To record cash payment of dividends.

December 1:

Debit Dividends - Common Stock with $249,000

Credit Dividends Payable with $249,000

To record $0.50 per share common stock dividend.

December 31:

Debit Dividends Payable with $249,000

Credit Cash Account with $249,000

To record payment of dividend.

Debit Net Income with $550,000

Credit Retained Earnings with $550,000

To record the transfer of net income to Retained Earnings.

Step-by-step explanation:

a) Whereas $60,000 cash was received for the issue, only $40,000 (10,000 x $4) is credited to Common Stock. The additional of $20,000 is credited to Additional Paid-in Capital. This shows that the shares were issued above their par value.

b) When 2,000 shares of treasury stock were reacquired at a total cost of $7 per share, the Treasury Stock account is debited with the par value of $4 per share ($8,000). The above par value difference is taken to the Additional Paid-in Capital account as a debit.

c) Dividends on preferred stock was prorated for 10 months, from January to October. This is because the percentage dividend is for a year.

d) Dividends on common stock would not be prorated since they are based on annual percentages like preferred stock. Dividends on the common stock is, therefore, calculable on the outstanding balance.

e) Treasury Stock is a contra account to the Common Stock as it reduces the balance of common stock outstanding. The outstanding balance of Treasury Stock increased to 12,000 (10,000 + 2,000).

f) Outstanding common stock reduced from 500,000 shares to 498,000 (500,000 + 10,000 - 12,000). The additional 10,000 represented the new issue and the 12,000 represented the Treasury Stock.