Question

The following is a summary of all relevant transactions of Vicario Corporation since it was organized in 2017. In 2017, 15,000 shares were authorized and 7,000 shares of common stock (\(50 par value) were issued at a price of \)57. In 2018, 1,000 shares were issued as a stock dividend when the stock was selling for \(60. Three hundred shares of common stock were bought in 2019 at a cost of \)64 per share. These 300 shares are still in the company treasury.

In 2018, 10,000 preferred shares were authorized and the company issued 5,000 of them (\(100 par value) at \)113. Some of the preferred stock was reacquired by the company and later reissued for \(4,700 more than it cost the company.

The corporation has earned a total of \)610,000 in net income after income taxes and paid out a total of $312,600 in cash dividends since incorporation.

Instructions

Prepare the stockholders’ equity section of the balance sheet in proper form for Vicario Corporation as of December 31, 2019. Account for treasury stock using the cost method.

Short answer

The total shareholders’ equity is$1,246,900

Step-by-step solution

Meaning of shareholders’ Equity

Shareholders' equity represents the total net profit of the organization. The valuation of capitalized stock value, extra paid-in capital, and retained earnings can all be used to calculate stockholders' equity.

Preparing Shareholders’ Equity

VICARIO CORPORATION Stockholders’ Equity December 31, 2019
Capital stock Preferred Stock,$100 par value 10,000 shares authorized 5,000 shares Issued and outstanding	$ 500,000
Common Stock,$50 par value 15,000 shares authorized, 8,000 shares issued 7,700 shares outstanding	400,000
Additional paid-in capital In excess of par-preferred $65,000 In excess of par-common 59,000 From treasury stock-preferred 4,700 Total paid-in capital	128,700 1,028,700
Retained earnings	237,400
Total paid-in capital and retained earnings	1,266,100
Less: Cost of treasury stock(300 shares common)	19,200
Total stockholders’ equity	$1,246,900

Working Notes:

Calculation of additional paid-in capital in excess of par –common.

$\begin{array}{rcl}\mathrm{In}\mathrm{excess}\mathrm{of}\mathrm{par}-\mathrm{common}& =& \left[\left(\mathrm{Issued}\mathrm{price}-\mathrm{Par}\mathrm{value}\right)\times \mathrm{common}\mathrm{shares}+\left(\mathrm{Issued}\mathrm{price}-\mathrm{par}\mathrm{value}\right)\times \mathrm{common}\mathrm{shares}\right]\\ & =& \left[\left(\$57-\$50\right)\times 7,000+\left(\$60-\$50\right)\times 1,000\right]\\ & =& \$49,000+\$10,000\\ & =& \$59,000\end{array}$

Calculation of Retained Earnings

$\begin{array}{rcl}\mathrm{Retained}\mathrm{earnings}& =& \mathrm{Net}\mathrm{income}-\mathrm{paid}\mathrm{out}-\left(\mathrm{stock}\mathrm{dividend}\times \mathrm{selling}\mathrm{value}\right)\\ & =& \$610,000-\$312,600-\left(1,000\times \$60\right)\\ & =& \$237,400\end{array}$