Question

P15-12 (LO1,2,3,4) (Analysis and Classification of Equity Transactions) Penn Company was formed on July 1, 2015. It was authorized to issue 300,000 shares of \(10 par value common stock and 100,000 shares of 8% \)25 par value, cumulative and nonparticipating preferred stock. Penn Company has a July 1–June 30 fiscal year.

The following information relates to the stockholders’ equity accounts of Penn Company.

Common Stock

Prior to the 2017–2018 fiscal year, Penn Company had 110,000 shares of outstanding common stock issued as follows.

1. 85,000 shares were issued for cash on July 1, 2015, at \(31 per share.

2. On July 24, 2015, 5,000 shares were exchanged for a plot of land which cost the seller \)70,000 in 2009 and had an estimated fair value of \(220,000 on July 24, 2015.

3. 20,000 shares were issued on March 1, 2016, for \)42 per share.

During the 2017–2018 fiscal year, the following transactions regarding common stock took place.

November 30, 2017 Penn purchased 2,000 shares of its own stock on the open market at \(39 per share. Penn uses the cost method for treasury stock.

December 15, 2017 Penn declared a 5% stock dividend for stockholders of record on January 15, 2018, to be issued on January 31, 2018. Penn was having a liquidity problem and could not afford a cash dividend at the time. Penn’s common stock was selling at \)52 per share on December 15, 2017.

June 20, 2018 Penn sold 500 shares of its own common stock that it had purchased on November 30, 2017, for \(21,000.

Preferred Stock

Penn issued 40,000 shares of preferred stock at \)44 per share on July 1, 2016.

Cash Dividends

Penn has followed a schedule of declaring cash dividends in December and June, with payment being made to stockholders of record in the following month. The cash dividends which have been declared since inception of the company through June 30, 2018, are shown below.

Declaration date	Common stock	Preferred stock
12/15/16	\(0.30 per share	\)1 per share
6/15/17	\(0.30 per share	\)1 per share
12/15/17	-	\(1 per share

No cash dividends were declared during June 2018 due to the company’s liquidity problems.

Retained Earnings

As of June 30, 2017, Penn’s retained earnings account had a balance of \)690,000. For the fiscal year ending June 30, 2018, Penn reported net income of $40,000.

Instructions

Prepare the stockholders’ equity section of the balance sheet, including appropriate notes, for Penn Company as of June 30, 2018, as it should appear in its annual report to the shareholders.

Short answer

Stockholder equity section totals$6,088,000.

Step-by-step solution

Definition of Stockholder’s Equity

The capital of the business entity invested by the shareholders/owner or portion of the capital raised through the issue of equity securities is known as stockholder’s equity. It also includes the portion of net income retained by the business.

Stockholder equity section

Particular	Amount $	Amount $
Equity
8% share capital – preference, $25 par value (cumulative, non-participating). Authorized to issue 100,000 shares, 40,000 shares issued and outstanding	$1,000,000
Share capital – Ordinary shares	1,154,000	$2,154,000
Share premium – preference	760,000
Share premium – ordinary	2,595,000
Share premium – Treasury stock	1,500	3,356,500
Retained earnings		636,000
Less: treasury shares		(58,500)
Total shareholder’s equity		$6,088,000

Working note:

Calculation of ordinary shares issued:

Shares issued	Amount of shares
85,000 shares	850,000
5,000 shares	50,000
20,000 shares	200,000
110,000	1,100,000
Stock dividend of 5% on 108,000 shares (5,400 shares)	54,000
115,400	$1,154,000

Calculation of share premium – ordinary shares

Particular	Amount $
85,000 shares	$1,785,000
5,000 shares	170,000
20,000 shares	640,000
Share premium	2,595,000

Calculation of retained earnings:

Particular	Amount $
Opening balance	$690,000
Add: net income	40,000
	730,000
Preferred dividend	(40,000)
Ordinary share dividend 5,400 shares @ $10 each	(54,000)
Ending retained earnings	$636,000

Calculation of treasury shares:

Particular	Amount $
Repurchased on 30 Nov 2017 2,000 shares @ $39 per share	$78,000
Less: resold on 20 June 2018 500 shares @ $39 per share	(19,500)
Treasury shares	$58,500