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8E

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Intermediate Accounting (Kieso)
Found in: Page 813

Short Answer

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.

The total cumulative dividend is $240,000.

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

See the step by step solution

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

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