Answer:
Indigo Corporation
Journal Entries:
Feb. 1:
Debit Cash Account with $60,000
Credit Common Stock with $40,000
Credit Additional Paid-in Capital with $20,000
To record the issue of 10,000 shares of common stock, par $4 at $6 each.
March 20:
Debit Treasury Stock with $8,000
Debit Additional Paid-in Capital with $6,000
Credit Cash Account with $14,000
To record the repurchase of 2,000 shares of treasury stock at $7 each.
October 1:
Debit Dividends - Preferred Stock with $35,000
Credit Dividends Payable with $35,000
To record preferred stock dividends declared.
November 1:
Debit Dividends Payable with $35,000
Credit Cash Account with $35,000
To record cash payment of dividends.
December 1:
Debit Dividends - Common Stock with $249,000
Credit Dividends Payable with $249,000
To record $0.50 per share common stock dividend.
December 31:
Debit Dividends Payable with $249,000
Credit Cash Account with $249,000
To record payment of dividend.
Debit Net Income with $550,000
Credit Retained Earnings with $550,000
To record the transfer of net income to Retained Earnings.
Explanation:
a) Whereas $60,000 cash was received for the issue, only $40,000 (10,000 x $4) is credited to Common Stock. The additional of $20,000 is credited to Additional Paid-in Capital. This shows that the shares were issued above their par value.
b) When 2,000 shares of treasury stock were reacquired at a total cost of $7 per share, the Treasury Stock account is debited with the par value of $4 per share ($8,000). The above par value difference is taken to the Additional Paid-in Capital account as a debit.
c) Dividends on preferred stock was prorated for 10 months, from January to October. This is because the percentage dividend is for a year.
d) Dividends on common stock would not be prorated since they are based on annual percentages like preferred stock. Dividends on the common stock is, therefore, calculable on the outstanding balance.
e) Treasury Stock is a contra account to the Common Stock as it reduces the balance of common stock outstanding. The outstanding balance of Treasury Stock increased to 12,000 (10,000 + 2,000).
f) Outstanding common stock reduced from 500,000 shares to 498,000 (500,000 + 10,000 - 12,000). The additional 10,000 represented the new issue and the 12,000 represented the Treasury Stock.
[ where a is a constant]