# Question & Answer: P8-58A. Record stock transactions, prepare equity section of balance sheet, and calculate ratio-(LO 1, 2, 3, 5, 6, 7). On January 1, 2011, Classic Clothing Corporati…..

P8-58A. Record stock transactions, prepare equity section of balance sheet, and calculate ratio-(LO 1, 2, 3, 5, 6, 7). On January 1, 2011, Classic Clothing Corporation’s shareholders’ equity account balances were as follows: During 2011, Classic Clothing Corporation engaged in the following transactions: Net income for the year was \$940,(XX). Requirements 1. Show each of the transactions in the accounting equation. 2. Prepare the shareholders’ equity section of the balance sheet at December 31, 2011. 3. Calculate return on common stockholder equity for the year ended December 31,2011.

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Question & Answer: P8-58A. Record stock transactions, prepare equity section of balance sheet, and calculate ratio-(LO 1, 2, 3, 5, 6, 7). On January 1, 2011, Classic Clothing Corporati…..
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Requirement 1:

 Date Assets = Liabilities + Stockholders’ Equity Preferred stock Common stock APIC Preferred stock APIC Common stock Retained earnings Treasury stock Beg. Bal. 800000 500000 30000 2000000 1650000 -60000 Jan-01 60000 10000 50000 Apr-01 -80000 -80000 Jun-01 40000 -40000 Jun-30 -40000 -40000 Dec-01 269500 -269500 Dec-31 -269500 -269500 800000 510000 30000 2050000 1340500 -140000

Number of common stock on which dividend declared = 500000 – 10000 + 10000 – 10000 = 490000 (excluding treasury stock)

Dividend = 490000 shares x \$0.55 = \$269500

Requirement 2:

 Classic Clothing Corporation Balance Sheet (Partial) December 31, 2011 Stockholders’ Equity Preferred Stock, (5%, \$80 par noncumulative, 35,000 800000 shares authorized) Common Stock, (\$1 par value, 750,000 shares authorized) 510000 Additional Paid-in Capital, Preferred Stock 30000 Additional Paid-in Capital, Common Stock 2050000 Retained Earnings 2280500 Treasury Stock – common (20,000 shares, at cost) -140000 5530500

Retained earnings = 1340500 + 940000 (net income for 2011) = \$2280500

Requirement 3:

Return on common stockholders’ equity = (Net income – Preferred dividend) / Average common stockholders’ equity = (940000 – 40000) / 4395250 = 20.48%

 Average common stockholders’ equity: Jan 1, 2011 Dec 31, 2011 Common Stock 500000 510000 Additional Paid-in Capital, Common Stock 2000000 2050000 Retained Earnings 1650000 2280500 Treasury Stock – common -60000 -140000 4090000 4700500

Average = (4090000 + 4700500)/2 = \$4395250