Question

On December 31, 2021, Cullumber Company had 1,290,000 shares of $6 par common stock issued and outstanding. At December 31, 2021, stockholders’ equity had the amounts listed here.

Common Stock $7,740,000
Additional Paid-in Capital 1,760,000
Retained Earnings 1,235,000

Transactions during 2022 and other information related to stockholders’ equity accounts were as follows.
1. On January 10, issued at $106 per share 125,000 shares of $104 par value, 8% cumulative preferred stock.
2. On February 8, reacquired 13,200 shares of its common stock for $12 per share.
3. On May 9, declared the yearly cash dividend on preferred stock, payable June 10, to stockholders of record on May 31.
4. On June 8, declared a cash dividend of $1.05 per share on the common stock outstanding, payable on July 10, to stockholders of record on July 1.
5. Net income for 2022 was $3,651,000.


Record the journal entries that are required for items 1–5 above.

Answer 1

Cullumber Company

Journal Entries:

January 10:

Debit Cash with $13,250,000

Credit 8% Cumulative Preferred Stock with $13,000,000

Credit Additional Paid-in Capital- Preferred Stock with $250,000

To record issue of 125,000 shares, par $104 at $106 each.

February 8:

Debit Treasury Stock with $

Debit Additional Paid-in Capital with $79,200

Credit Cash Account with $158,400

To record 13,200 common stock reacquired at $12 per share.

May 9:

Debit Dividend - Preferred with $520,000

Credit Dividends Payable with $520,000

To record 8% dividend on Preferred Stock for the half-year.

May 31:

Debit Dividends Payable with $520,000

Credit Cash Account with $520,000

To record payment of dividends to preferred stockholders.

June 8:

Debit Dividends - Common with $1,340,640

Credit Dividends Payable with $1,340,640

To record $1.05 per share on the common stock outstanding.

July 10:

Debit Dividends Payable with $1,340,640

Credit Cash Account with $1,340,640

To record payment of dividends to common stockholders.

No. 5:

Debit Net Income with $3,651,000

Credit Retained Earnings with $3,651,000

To record the transfer of net income to Retained Earnings.

Step-by-step explanation:

a) The preferred stock was issued at $106 with $104 par value. The difference of $2 x $125,000 is recorded as Additional Paid-in Capital - Preferred Stock. This is equal to $250,000.

b) Treasury Stock represents outstanding shares reacquired. The par value was $6, but the reacquisition cost was $12. This gives additional cost of $6. This additional cost is taken to the Additional Paid-in Capital Account as a debit. The par value is debited to the Treasury Stock account. The method used is the par value method.

c) When cash preferred dividends are declared for the half-year, the dividend calculation is prorated because ordinarily the dividend is 8% per annum.

d) The cash dividend for common stock is not prorated since it is not based on a fixed percentage per annum unlike the preferred stock.

Answer 2

Answer and Explanation:

The journal entries are shown below:

1. Cash $13,250,000 (125,000 shares × $106)

To Preferred stock $13,000,000 (125,000 shares × $104)

To Additional paid in capital in excess of par - preferred stock $250,000 (125,000 shares × $2)

2. Treasury stock (13,200 shares × $12) $158,400

To Cash $158,400

(Being the required shares is recorded)

3. Cash dividend $1,040,000 (125,000 shares × 8% × $104)

To Dividend payable $1,040,000

(Being the declaration of the dividend is recorded)

4. Cash dividend $1,340,640 (1,290,000 shares - 13,200 shares) × $1.05

To Dividend payable $1,340,640

(Being the declaration of the dividend is recorded)

5. Dividend payable Dr $1,040,000 (125,000 shares × 8% × $104)

To cash $1,040,000

(Being the payment is recorded)

6. Dividend payable Dr $1,340,640 (1,290,000 shares - 13,200 shares) × $1.05

To cash $1,340,640

(Being the payment is recorded)