Temte Corporation is authorized to issue 1,000,000 shares of no-par common stock and 250,000 shares of 6 percent, $25 par value, cumulative preferred stock. These events affected stockholders’ equity during the first year of operations:
1. 125,000 shares of common stock were sold for $20 per share.
2. 25,000 shares of preferred stock were sold for $40 per share.
3. A building with a fair market value of $280,000 was acquired for a cash payment of $112,000 and 7,000 shares of common stock.
4. 15,000 shares of common stock were issued for $270,000 cash.
5. A dividend of $.50 per share for common and $1.50 per share for preferred stock was declared.
Required:
A. Record the transactions described above.
B. Prepare the stockholders’ equity section of the balance sheet for December 31 assuming that Temte Corporation generated $615,000 of income.
A. Recording the transactions described above:
1. Sale of 125,000 shares of common stock for $20 per share:
- Debit: Cash $2,500,000 (125,000 shares x $20)
- Credit: Common Stock $0 (since no-par stock)
- Credit: Additional Paid-In Capital (APIC) - Common $2,500,000 (difference between cash received and par value)
2. Sale of 25,000 shares of preferred stock for $40 per share:
- Debit: Cash $1,000,000 (25,000 shares x $40)
- Credit: Preferred Stock $625,000 (25,000 shares x $25 par value)
- Credit: APIC - Preferred $375,000 (difference between cash received and par value)
3. Acquisition of a building with FMV of $280,000 for $112,000 cash and 7,000 shares of common stock:
- Debit: Building $280,000
- Debit: Cash $112,000
- Credit: Common Stock $0 (since no-par stock)
- Credit: APIC - Common $392,000 (difference between cash paid and fair value of building)
4. Issuance of 15,000 shares of common stock for $270,000 cash:
- Debit: Cash $270,000
- Credit: Common Stock $0 (since no-par stock)
- Credit: APIC - Common $270,000 (difference between cash received and fair value)
5. Declaration of dividends: $.50 per share for common and $1.50 per share for preferred stock:
- Debit: Retained Earnings $100,000 (125,000 common shares x $0.50)
- Debit: Retained Earnings $37,500 (25,000 preferred shares x $1.50)
- Credit: Dividends Payable $137,500 (total amount of dividends declared)
B. Prepare the stockholders' equity section of the balance sheet for December 31 assuming that Temte Corporation generated $615,000 of income:
Net Income: $615,000
Retained Earnings:
- Opening Balance (assumed to be zero): $0
- Add: Net Income: $615,000
- Less: Dividends Declared: $137,500
- Closing Balance: $477,500 ($0 + $615,000 - $137,500)
Stockholders' Equity:
- Common Stock: $0
- Preferred Stock: $625,000 (25,000 shares x $25 par value)
- Additional Paid-In Capital (APIC):
- Common: $2,900,000 ($2,500,000 + $392,000 + $270,000)
- Preferred: $375,000
- Retained Earnings: $477,500 (calculated above)
Total Stockholders' Equity: $4,377,500