Question

Question:The following selected information is from Princeton Company’s comparative balance sheets.

At December 31 2017 2016

Common stock, \(10 par value . . . . . . . . . . . . \)105,000 \(100,000

Paid-in capital in excess of par . . . . . . . . . . . . 567,000 342,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . 313,500 287,500

The company’s net income for the year ended December 31, 2017, was \)48,000.

1. Compute the cash received from the sale of its common stock during 2017.

2. Compute the cash paid for dividends during 2017.

Short answer

Answer

1. The total cash received from the sale of common stock is computed as $230,000
2. The cash paid for dividends is computed as $22,000

Step-by-step solution

Meaning of Retained Earnings 

Retained earnings refer to that part of the company's net profit that remains with the company after paying all the dividends.

Computation of cash received from the sale of its common stock during 2017

$\begin{array}{rcl}\mathbf{Total}\mathbf{}\mathbf{cash}\mathbf{}\mathbf{received}& \mathbf{=}& \mathbf{Cash}\mathbf{}\mathbf{recieved}\mathbf{}\mathbf{from}\mathbf{}\mathbf{issuance}\mathbf{}\mathbf{of}\mathbf{}\mathbf{common}\mathbf{}\mathbf{stock}\\ & & \mathbf{+}\mathbf{Cash}\mathbf{}\mathbf{recieved}\mathbf{}\mathbf{for}\mathbf{}\mathbf{paid}\mathbf{}\mathbf{in}\mathbf{}\mathbf{capital}\mathbf{}\mathbf{in}\mathbf{}\mathbf{excess}\mathbf{}\mathbf{of}\mathbf{}\mathbf{common}\mathbf{}\mathbf{stock}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{5}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{225}\mathbf{,}\mathbf{000}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{230}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Computation of Cash paid for dividends during 2017

$\begin{array}{rcl}\mathbf{Cash}\mathbf{}\mathbf{paid}\mathbf{}\mathbf{for}\mathbf{}\mathbf{dividends}& \mathbf{=}& \mathbf{Beginning}\mathbf{}\mathbf{Balance}\mathbf{}\mathbf{of}\mathbf{}\mathbf{retained}\mathbf{}\mathbf{earnings}\\ & & \mathbf{+}\mathbf{Net}\mathbf{}\mathbf{income}\mathbf{-}\mathbf{Ending}\mathbf{}\mathbf{balance}\mathbf{}\mathbf{of}\mathbf{}\mathbf{retained}\mathbf{}\mathbf{earnings}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{287}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{48}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{313}\mathbf{,}\mathbf{500}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{22}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Working note:

Dr.	Common stock		Cr.
		Bal., Dec 31,2016	$100,000
		Issued stock (Bal)	$5,000
		Bal., Dec 31,2017	$105,000

Dr.	Retained Earnings		Cr.
		Bal., Dec 31,2016	$287,500
Cash dividend(Bal)	$22,000	Net income	$48,000
		Bal., Dec 31,2017	$313,500

Dr.	Paid in capital in excess of par		Cr.
		Bal., Dec 31,2016	$342,000
		Issued stock (Bal)	$225,000
		Bal., Dec 31,2017	$567,000