Question

Pistons Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first month, he made the following entries for the corporation’s capital stock.

S.no.	Particular	Folio	Debit \(	Credit \)
May 2	Cash		192,000
	Capital Stock			192,000
	(Issued 12,000 shares of \(5 par value common stock at \)16 per share)
May 10	Cash		600,000
	Capital Stock			600,000
	(Issued 10,000 shares of \(30 par value preferred stock at \)60 per share)
May 15	Capital Stock		15,000
	Cash			15,000
	(Purchased 1,000 shares of common stock for the treasury at \(15 per share)
May 31	Cash		8,500
	Capital Stock			5,000
	Gain on Sale of Stock			3,500
	(Sold 500 shares of treasury stock at \)17 per share)

Instructions

On the basis of the explanation for each entry, prepare the entries that should have been made for the capital stock transactions.

Short answer

The total cumulative dividend is $240,000.

The total paid-in capital in excess of par is $70,000.

Step-by-step solution

Meaning of Capital stock

The shares of ownership issued by a corporation are capital stock. The sum received by the corporation when its shares of capital stock were issued is represented as paid-in capital on the balance sheet in the shareholders' equity section.

Preparing the entries that should have been made for the capital transaction

(a) The Cumulative dividend is disclosed in a note to the stockholders’ equity section; it is not reported as a liability.

S.no.	Particular	Folio	Debit $	Credit $
(b)	Preferred stock A/c.		400,000
	Common Stock A/c.			280,000
	Paid-in Capital in excess of par common Stock A/c.			120,000
	To record the issue of stock

(c)Paid-in capital

Preferred stock, ($100 par, 8% 10,000 shares issued)	$1,000,000
Paid-in Capital in excess of par (10,000*$7)	70,000