Question

The stockholders' equity of Embassy Corporation at December 31, 2017, is shown as follows. Stockholders' equity: Common stock, $10 par, 100,000 shares authorized, 40,000 shares issued and outstanding. $ 400,000 Additional paid-in capital: common stock 200,000 Total paid-in capital........... $ 600,000 Retained earnings ............ 1,700,000 Total stockholders' equity... $2,300,000 .... Transactions affecting stockholders' equity during 2018 are as follows. Mar.31 A 5-for-4 stock split proposed by the board of directors was approved by vote of the stockholders. The 10.000 new shares were distributed to stockholders. Apr. The company purchased 2,000 shares of its common stock on the open market at $37 per share. July 1 The company reissued 1.000 shares of treasury stock at $48 per share. July 1 The company issued for cash 20,000 shares of previously unissued $8 par value common stock at a price of $47 per share. Dec. 1 A cash dividend of Si per share was declared. payable on December 30, to stockholders of record at December 14. Dec.22 A 10 percent stock dividend was declared; the dividend shares are to be distributed on January 15 of the following year. The market price of the stock on December 22 was $48 per share. The net income for the year ended December 31, 2018, amounted to $173,000, after discontinued page 542 operations of $47.400 (net of related income tax benefits). Instructions a. Prepare journal entries in general journal form to record the six transactions described that affect stockholders' equity daring the year. b. Prepare the lower section of the income statement for 2018, beginning with income from continuing operations, showing discontinued operations, net income and earnings per share based on the weighted- average number of shares outstanding during the year. For simplicity purposes, you may present discontinued operations as a single amount c. Prepare a statement of retained earnings for the year ending December 31, 2018.

Answer 1

1.

Date	Account title and explanations	Debit	Credit
Mar 31	No entry
Apr 1	Treasury stock	$74,000
	Cash [2,000 x $37]		$74,000
	[Purchase of own shares]
July 1	Cash [1,000 x $48]	$48,000
	Treasury stock [1,000 x $37]		$37,000
	Additional paid-in capital from treasury stock		$11,000
	[Re-issue of treasury stcok]
July 1	Cash [20,000 x $47]	$940,000
	Common stock [20,000 x $8]		$160,000
	Additional paid-in capital - common stock		$780,000
	[Issued common shares for cash]
Dec 1	Retained earnings	$69,000
	Dividends payable-common [69,000 x $1]		$69,000
	[Declaration of cash dividends]
Dec 22	Retained Earnings [6,900 x $48]	$331,200
	Common Stock dividend distributable [6,900 x $8]		$55,200
	Paid-in Capital in Excess of Par-Common		$276,000
	[Declaration of stock dividends]
Dec 30	Dividends payable-common	$69,000
	Cash		$69,000
	[Payment of dividend]

2.

Embassy Corporation
Income statement (partial)
For the year ended December 31,2017
Income from continuing operations	$220,400
Income(loss) from discontinuing operations:
Loss on discontinued operations	($47,400)
Net income	$173,000
EPS (173,000/59,000*)	$2.93

3.

Embassy Corporation
Statement of retained earnings
For the year ended December 31,2017
Retained Earnings as on Dec 31,2017		$1,700,000
Add: Net income		$173,000
Subtotal		$1,873,000
(Less): Dividends
Cash dividends	$69,000
Stock dividends	$331,200	($400,200)
Retained Earnings as on Dec 31,2018		$1,472,800

Calculations:

*

	Calculations	Weights
Jan 1 - Mar 31	50,000 x 3/12	12,500
Apr 1 -July 1	48,000 x 3/12	12,000
July 1 - Dec 31	69,000 x 6/12	34,500
Total weighted average no. of shares		59,000

Common shares outstanding
Beginning	40,000
March 1 (5 for 4 stock split)	50,000
Apr 1 (Treasury stock)	-2,000
Balance	48,000
July 1 (Re-issue of treasury stock)	1,000
July 1 (New issue)	20,000
Balance	69,000