Answers Exercise Mock Exam 4: Equity
The stockholder’s equity section of Red Tulips Ltd.´s balance sheet as of December 31, 2017 was as
follows:
Contributed capital
Common stock, €8 par value, 200,000 shares
authorized, 55,500 shares issued and outstanding
Paid-in capital in excess of par - common stock
Total contributed capital
Retained earnings
€444,000
€329,000
€773,000
€620,000
Total stockholders’ equity
€1,393,000
The following transactions affecting stockholder´s equity occurred in 2018:
Jan.
10
Feb. 17
Feb. 20
Mar. 28
The company issued 18,000 common shares in exchange for a building. The market value of
the common stock was €10 per share.
The board of directors obtained authorization for 150,000 shares of €30 par value, 6 percent
noncumulative preferred stock.
The company issued 10,000 shares of preferred stock at par value and another 5,000 shares of
preferred stock in exchange for legal services valued at €170,000.
July 24
Sept. 4
Sept. 25
The company purchased 10,000 shares of common stock for the treasury at an average price of
€15 per share.
The company sold 1,000 of the shares purchased on March 28, at a price of €14 per share.
The company sold 5,000 of the shares purchased on March 28, at a price of €17 per share.
The board of directors declared a 2 percent stock dividend on the common stock. The market
value of the common shares was €20.
Date of record for stock dividend.
The company declared and paid the cash dividend on preferred stock.
The company paid the stock dividend on common stock.
Dec. 31
The company closed the Income Summary account, which has a credit balance of €245,000.
Dec. 31
The company closed the cash dividends and stock dividends accounts.
Apr. 20
May 4
July 3
Question A
Prepare the journal entries to record the above transactions. Please skip a line between each journal
entry. State explicitly if no journal entry is needed. The chart of accounts is provided ate the end of this
exercise. Use only these accounts in your answers.
Date
Jan. 10
Account
Building (18,000*10)
Debit
180,000
Credit
Common stock (18,000*8)
144,000
Paid-in-capital in excess of par - common stock (18,000*2)
36,000
Feb. 17
No entry required
Feb. 20
Cash (10,000*30)
300,000
Legal services
170,000
1
Mar. 28
Preferred stock (15,000*30)
450,000
Paid-in-capital in excess of par - preferred stock (170,000-150,000)
20,000
Treasury stock (10,000*15)
150,000
Cash (10,000*15)
Apr. 20
150,000
Cash (1,000*14)
14,000
Retained earnings (1,000*1)
1,000
Treasury stock (1,000*15)
May 4
July 3
15,000
Cash (5,000*17)
85,000
Treasury stock (5,000*15)
75,000
Paid-in-capital from sale of treasury stock (5,000*2)
10,000
Stock dividends (69,500*0.02*20)
27,800
Stock dividends distributable (69,500*0.02*8)
11,120
Paid-in-capital in excess of par - common stock
16,680
July 24
No entry required
Sept. 4
Cash Dividends (15,000*30*6%)
27,000
Cash
Sept. 25
27,000
Stock dividends distributable
11,120
Common stock
Dec. 31
11,120
Income summary
245,000
Retained earnings
Dec. 31
245,000
Retained earnings
54,800
Cash Dividends
27,000
Stock Dividends
27,800
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Question B
Prepare the stockholder’s equity section of the company’s balance sheet as of December 31, 2018 by
completing the following form.
Red Tulips Ltd.
Stockholders' Equity
December 31, 2018
(All amounts are in €)
Contributed capital
-
Preferred stock, €30 par value, 6 percent noncumulative,
450,000
150,000 shares authorized, 15,000 shares issued and outstanding
-
Common stock, €8 par value, 200,000 shares
599,120
authorized, 74,890 shares issued, 70,890 shares outstanding
-
Paid-in capital in excess of par - preferred stock
20,000
-
Paid-in capital in excess of par - common stock
381,680
-
Paid-in capital from sale of treasury stock
10,000
Total contributed capital
1,460,800
Retained earnings (620,000 – 1,000 + 245,000 – 54,800)
809,200
Total contributed capital & retained earnings
2,270,000
Treasury Stock (4,000 shares at cost (€15))
(60,000)
Total stockholders’ equity
2,210,000
Question C
What are stock dividends? What consequences do they have on the balance sheet?
Stock dividends are a proportional distribution of shares to the company’s stockholders. In other
words, a stock dividend means that stockholders receive additional stocks, rather than cash.
Stock dividends entail a transformation of stockholders’ equity from Retained earnings to Contributed
capital, meaning that the total value of stockholder’s equity remains the same.
Stock dividends do not entail a change in the firm’s assets and liabilities.
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Chart of accounts (accounts in alphabetical order)
Accounts Payable
Accounts Receivable
Bonds Payable
Building
Cash
Cash Dividends
Cash Dividends Payable
Common Stock
Discount on Bonds Payable
Income Summary
Interest Expense
Interest Payable
Interest Receivable
Interest Revenue
Legal Services
Paid-in Capital from Sale of Treasury Stock
Paid-in Capital in Excess of Par - Common Stock
Paid-in Capital in Excess of Par - Preferred Stock
Preferred Stock
Premium on Bonds Payable
Retained Earnings
Stock Dividends
Stock Dividends Distributable
Treasury Stock
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