Answer:
Equinox Products Inc. during the fiscal year ended December 31, 20Y8
Journal Entries:
Jan 3.
Debit Cash Account $450,000
Credit Common Stock $300,000
Credit Additional Paid-in Capital: Common Stock $150,000
To record the issue of 15,000 shares of $20 par at $30 per share.
Feb. 15
Debit Cash Account $400,000
Credit Preferred 5% Stock $320,000
Credit Additional Paid-in Capital: Preferred Stock $80,000
To record the issue of 4,000 shares of $80 par at $100 per share.
May 1:
Debit Cash $520,000
Credit 5% 10-year Bonds $500,000
Credit Bond Premium $20,000
To record the issue of $500,000 at 104, with interest payable semiannually.
May 16:
Debit Dividends: Common Stock $50,000
Debit Dividends: Preferred Stock $20,000
Credit Dividends Payable $70,000
To record the declaration of a quarterly dividend of $0.50 per share on 100,000 common stock shares and $1.00 per share on 20,000 preferred stock shares.
May 26:
Debit Dividends Payable $70,000
Credit Cash Account $70,000
To record the payment of cash dividends.
Jun. 8:
Debit Treasury Stock $160,000
Debit Additional Paid-in Capital: Common Stock $104,000
To record the repurchase of shares at $33 per share.
June 30:
Debit Dividends: Preferred Stock $20,000
Credit Dividends Payable $20,000
To record the declaration of a quarterly dividend of $1.00 per share on 20,000 preferred stock shares.
Jul. 11:
Debit Dividends Payable $20,000
Credit Cash Account $20,000
To record the payment of cash dividends.
Oct. 7:
Debit Cash Account $98,800
Credit Treasury Common Stock $52,000
Credit Additional Paid-in Capital: Common Stock $46,800
To record the reissue of 2,600 shares of treasury common stock at $38.
Oct. 31:
Debit Bonds Interest $12,500
Credit Cash Account $12,500
To record the payment of semiannual interest on the bonds.
Debit Bond Premium $1,000
Credit Bond Premium Amortization $1,000
To record the amortization of the premium for six months using the straight-line method.
Explanation:
a) Common Stock issued at $30 with $20 par value means that the shares were issued at above par value. The difference is accounted for in a separate account called Additional Paid-in Capital. The same applies to the preferred stock issued at above par value.
b) The face value of the Bonds is $500,000 but issued at a premium. The total premium is $20,000 ($500,000 x 0.04).
c) Dividends on the Common Stock = $0.50 * 100,000 shares = $50,000. The preferred stock dividends = $1.00 * 20,000 = $20,000.
d) Treasury Stock represents the value of common stock repurchased or reissued from stockholders by the company. There are two methods to treat the above or below par value at which the shares are repurchased or issued. One method is the costing method where the above or below par value is not taken to a separate account, but everything is treated in the Treasury Stock account. The other method is the par value method. This treats the above or below par value in the Additional Paid-in Capital account. This is the method adopted here. Note that Treasury Stock is a contra account to the Common Stock.
e) Bond Premium Amortization (straight-line method) is calculated as follows: $20,000/10 *6/12 = $1,000 for six months. A Premium on Bonds arises when the bonds are trading at above the face value. The amortization of Bond Premium is the write-down of the excess premium paid or received over and above the face value of the Bond. In this case, we used the straight-line method.
