Question

(Equity Transactions and Statement Preparation) On January 5, 2017, Phelps Corporation received a charter granting the right to issue 5,000 shares of \(100 par value, 8% cumulative and nonparticipating preferred stock, and 50,000 shares of \)10 par value common stock. It then completed these transactions.

Jan. 11 Issued 20,000 shares of common stock at \(16 per share.

Feb. 1 Issued to Sanchez Corp. 4,000 shares of preferred stock for the

following assets: equipment with a fair value of \)50,000; a factory

building with a fair value of \(160,000; and land with an

appraised value of \)270,000.

July 29 Purchased 1,800 shares of common stock at \(17 per share. (Use cost

method.)

Aug. 10 Sold the 1,800 treasury shares at \)14 per share.

Dec. 31 Declared a \(0.25 per share cash dividend on the common stock and

declared the preferred dividend.

Dec. 31 Closed the Income Summary account. There was a \)175,700 net

income.

Instructions

1. Record the journal entries for the transactions listed above.
2. Prepare the stockholders’ equity section of Phelps Corporation’s balance sheet as of December 31, 2017.

Short answer

The total amount of debit and credit side of the Journal is$1,073,900and the totalshareholders’ equity is$900,300

Step-by-step solution

Meaning of Shareholder Equity

Stockholders’ equity refers to the sum of capital and retained earnings on a balance sheet.Stockholders’ Equity also represents the difference between assets and liabilities.

Preparing Journal Entries

S.no.	Particular	Debit $	Credit $
January 11	Cash	320,000
	Common Stock		200,000
	Paid-in Capital in Excess of Par-common Stock		120,000
	To record the issue of stock.
February 1	Equipment	50,000
	Building	160,000
	Land	270,000
	Preferred Stocks		400,000
	Paid-in Capital in Excess of Par-preferred Stock		80,000
	To record the issue of stock.
July 29	Treasury Stock	30,600
	Cash		30,600
	To record the issue of shares.
August 10	Cash	25,200
	Retained Earnings	5,400
	Treasury Stock		30,600
	To record the sale of treasury stock.

Note: - The debit is made to Retained Earnings because no Paid-in Capital from Treasury Stock exists.

S.no.	Particular	Debit $	Credit $
December 31	Retained earnings	37,000
	Dividend Payable		37,000
	To record the declaration of dividend.

Calculation of Dividend Payable

$\begin{array}{rcl}\mathrm{Common}\mathrm{stock}\mathrm{cash}\mathrm{dividend}& =& \mathrm{Common}\mathrm{Shares}\times \mathrm{Dividend}\mathrm{Price}\\ & =& 20,000\times \$0.25\\ & =& \$5,000\end{array}$

$\begin{array}{rcl}\mathrm{Preferred}\mathrm{cash}\mathrm{dividend}& =& \mathrm{Preferred}\mathrm{share}\times \mathrm{Par}\mathrm{Value}\\ & =& 4,000\times 100\times 8\%\\ & =& \$32,000\end{array}$

$\begin{array}{rcl}\mathrm{Total}\mathrm{cash}\mathrm{dividend}& =& \mathrm{Common}\mathrm{Stock}\mathrm{Dividend}+\mathrm{Preferred}\mathrm{Cash}\mathrm{dividend}\\ & =& \$5,000+\$32,000\\ & =& \$37,000\end{array}$

S.no.	Particular	Debit $	Credit $
December 31	Income Summary	175,700
	Retained Earnings		175,700
	To record the closing of income summary.

Preparing Stockholders’ Equity

PHELPS CORPORATION Stockholders’ Equity December 31, 2014
Capital Stock Preferred stock-par value $100 per share, 8% cumulative and nonparticipating,5,000 Shares authorized,4,000 shares issued and outstanding	$400,000
Common stock –par value $10 per share, 50,000 shares authorized, 20,000 shares issued and outstanding Total capital stock	200,000 600,000
Additional paid-in-capital In excess of par-preferred $ 80,000 In excess of par-common 120,000 Total paid-in capital	200,000 800,000
Retained Earnings	133,300
Total stockholders’ Equity	$933,300

Calculation of Retained Earnings

$\begin{array}{rcl}\mathrm{Total}\mathrm{amount}\mathrm{of}\mathrm{retained}\mathrm{earnings}& =& \mathrm{Net}\mathrm{income}-\mathrm{Retained}\mathrm{easrings}-\mathrm{Dividend}\mathrm{payable}\\ & =& \$175,700-\$5,400-\$37,000\\ & =& \$133,300\end{array}$