Question

Tony and Suzie have purchased land for a new camp. Now they need money to build the cabins, dining facility, a ropes course, and an outdoor swimming pool. Tony and Suzie first checked with Summit Bank to see if they could borrow an additional $1 million, but unfortunately the bank turned them down as too risky. Undeterred, they promoted their idea to close friends they had made through the outdoor clinics and TEAM events. They decided to go ahead and sell shares of stock in the company to raise the additional funds for the camp Great Adventures has authorized $1 par value common stock. When the company began on July 1, 2021, Tony and Suzie each purchased 10,000 shares (20,000 shares total) of $1 par value common stock at $1 per share. The following transactions affect stockholders' equity during the remainder of 2022:
November 5 Issue an additional 100,000 shares of common stock for $10 per share.
November 16 Purchase 10,000 shares of its own common stock (i.e., treasury stock) for $15 per share.
November 24 Resell 4,000 shares of treasury stock at $16 per share.
December 1 Declare a cash dividend on its common stock of $11,400 ($0.10 per share) to all stockholders of record on December 15.
December 20 Pay the cash dividend declared on December 1.
December 31 Pay $800,000 for construction of new cabins and other facilities. The entire expenditure is recorded in the Buildings account. Required: 1.

Required
1. Record each of these transactions. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

2. Great Adventures has net income of $35,835 in 2022. Retained earnings at the beginning of 2022 was $33,450. Prepare the stockholders' equity section of the balance sheet for Great Adventures as of December 31, 2022. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Answer:

Great Adventures

1. Journal Entries for 2022 Transactions:

Nov 5:

Debit Cash Account with $1,000,000

Credit Common Stock with $100,000

Credit Additional Paid-in Capital with $900,000

To record issue of additional 100,000 shares for $10 per share.

Nov. 16:

Debit Treasury Stock with $10,000

Debit Additional Paid-in Capital with $140,000

Credit Cash Account with $150,000

To record repurchase of 10,000 treasury stock for $15 per share.

Nov. 24:

Debit Cash Account with $64,000

Credit Additional Paid-in Capital with $60,000

Credit Treasury Stock with $4,000

To record resale of 4,000 shares of treasury stock at $16 per share.

Dec. 1:

Debit Dividend with $11,400

Credit Dividends Payable with $11,400

To record declaration of cash dividend of $0.10 per share.

Dec. 15:

No Journal entries required

Dec. 20:

Debit Dividend Payable with $11,400

Credit Cash Account with $11,400

To record the payment of dividend.

Dec 31:

Debit Buildings Account with $800,000

Credit Cash Account with $800,000

To record payment for construction of new cabins and other facilities.

2. Stockholders' Equity section of the Balance Sheet as at Dec. 31, 2022:

Common Stock = $114,000 ((20,000 + 100,000 - 10,000 + 4,000) x $1))

Less Treasury Stock = $6,000 ((10,000 - 4,000) x $1)

Add Additional Paid-in Capital = $820,000 ($900,000 - 140,000 + 60,000)

Retained Earnings = $57,885 ($33,450 + 35,835 - 11,400)

Total Equity = $985,885

Explanation:

1. Journal entries are used to show the accounts to be debited and the accounts to be credited in the general ledger.

2. The Common Stock is recorded at par value.  The above-par value is recorded in Additional Paid-in Capital in accordance with US GAAP.

3.  Treasury Stock represents repurchase of own stock.  It is a contra account to the Common Stock.  The number of shares outstanding is the sum of shares of common stock less the shares of treasury stock.  The par value method was used to recognize Treasury Stock.  This method recognizes the par value in the Treasury Stock while the above par value is reported in Additional Paid-in Capital account.  The other method for recognizing Treasury Stock is the cost method.  With this method, both the par value and above par value are recognized in the Treasury Stock account.

4.  The retained earnings ending balance is the addition of the beginning balance and net income, while dividend payment is deducted.