Answer:
Power Drive Corporation
Journal Entries:
March 1:
Debit Cash Account with $2,548,000
Credit Common Stock with $52,000
Credit APIC - Common Stock with $2,496,000
To record issue of 52,000 additional shares of $1 par value common stock for $49 per share.
May 10:
Debit Treasury Stock with $4,700
Debit APIC - Common Stock with $239,700
Credit Cash Account with 244,400
To record repurchase of 4,700 shares of treasury stock for $52 per share.
June 1:
Debit Dividends- Common Stock with $198,855
Credit Dividends Payable with $198,855
To record cash dividend of $1.35 per share declared (147,300 shares).
June 15:
No records required
July 1:
Debit Dividends Payable with $198,855
Credit Cash Account with $198,855
To record payment of cash dividend.
October 21:
Debit Cash Account with $133,950
Credit Treasury Stock with $2,350
Credit APIC - Common Stock with $131,600
To record reissue of treasury stock for $57 per share.
Explanation:
1. Issue of 52,000 additional shares results to a credit to the Common Stock account with 52,000 x $1 par value. This is equal to $52,000. The additional $48 x 52,000 goes to the Additional Paid-in Capital.
2. Treasury stock is the repurchase of outstanding stock by the company. When repurchase at more than the par value, the difference is a debit to the Additional Paid-in Capital account, when the par value method is adopted. The other method, which records the whole costs in the Treasury Stock account is the cost method. Remember that the Treasury Stock account is a contra account to the Common Stock account.
3. Dividends are payable on outstanding stock. The outstanding stock on June 1 to June 15 is calculated as follows:
Opening balance = 100,000 shares
New issue = 52,000 shares
less Treasury = (4,700)
Total = 147,300 shares
Dividends are then payable on 147,300 shares at $1.35 per share. This gives a total of $198,855.
4. The resale of Treasury stock reduces the balance of the treasury stock account at par value and increases the Additional Paid-in Capital account with the premium.
