The two cases described below are independent of each other. Each case provides the information necessary to prepare the stockholders' equity section of a corporate balance sheet.
a.
Early in 2007, Wesson Corporation was formed with the issuance of 50,000 shares of capital stock at $5 per share. The corporation reported a net loss of $32,000 for 2007, and a net loss of $12,000 in 2008. In 2009 the corporation reported net income of $90,000 and declared a dividend of 50 cents per share.
b.
Martin Industries was organized early in 2005 with the issuance of 100,000 shares of capital stock at $10 per share. During the first five years of its existence, the corporation earned a total of $800,000 and paid dividends of 25 cents per share each year on the common stock.
Required:
Prepare the stockholders' equity section of the corporate balance sheet for each company for the year ending December 31, 2009.
To prepare the stockholders' equity section of the corporate balance sheet, we need to calculate the various components of stockholders' equity, such as capital stock, retained earnings, and dividends.
a. Wesson Corporation:
1. Capital Stock:
The company issued 50,000 shares of capital stock at $5 per share. So, the capital stock is calculated as:
Capital Stock = Number of Shares × Par Value per Share
Capital Stock = 50,000 × $5 = $250,000
2. Retained Earnings:
To calculate retained earnings, we need to consider the net income and net loss of the company for each year. The formula for calculating retained earnings is:
Retained Earnings = Beginning Retained Earnings + Net Income/Loss - Dividends
For 2007:
Retained Earnings = 0 (since it's the first year) - Net Loss = 0 - (-$32,000) = $32,000
For 2008:
Retained Earnings = $32,000 (beginning retained earnings from 2007) - Net Loss = $32,000 - (-$12,000) = $44,000
For 2009:
Retained Earnings = $44,000 (beginning retained earnings from 2008) + Net Income - Dividends
Retained Earnings = $44,000 + $90,000 - (50,000 shares × $0.50 per share)
Retained Earnings = $44,000 + $90,000 - $25,000
Retained Earnings = $109,000
3. Dividends:
The company declared a dividend of 50 cents per share. So, the total dividends paid can be calculated as:
Dividends = Number of Shares × Dividend per Share
Dividends = 50,000 shares × $0.50 per share = $25,000
Now, we can prepare the stockholders' equity section for Wesson Corporation as follows:
Stockholders' Equity
---------------------
Capital Stock: $250,000
Retained Earnings: $109,000
Total Stockholders' Equity: $359,000
b. Martin Industries:
1. Capital Stock:
The company issued 100,000 shares of capital stock at $10 per share. So, the capital stock is calculated as:
Capital Stock = Number of Shares × Par Value per Share
Capital Stock = 100,000 × $10 = $1,000,000
2. Retained Earnings:
To calculate retained earnings, we need to consider the net income earned and dividends paid each year. The formula for calculating retained earnings is:
Retained Earnings = Beginning Retained Earnings + Net Income - Dividends
For each year, we have the same dividends paid and no net loss.
For 2005:
Retained Earnings = 0 (since it's the first year) + Net Income - (100,000 shares × $0.25 per share)
Retained Earnings = 0 + $800,000 - $25,000
Retained Earnings = $775,000
For 2006-2009 (same calculation for each year):
Retained Earnings = $775,000 (beginning retained earnings from the previous year) + $800,000 - (100,000 shares × $0.25 per share)
Retained Earnings = $775,000 + $800,000 - $25,000
Retained Earnings = $1,550,000
Now, we can prepare the stockholders' equity section for Martin Industries as follows:
Stockholders' Equity
---------------------
Capital Stock: $1,000,000
Retained Earnings: $1,550,000
Total Stockholders' Equity: $2,550,000