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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…..

P8-58A. Recond stock transactions, prepare equity section of balance sheet, and calculate ratio (LO 1. 2. 3.5, 6, 7). On January 1, 2011, Classic Clothing Corporations shareholders equi account balances were as follows: Preferred stock (5%, $80 par noncumulative, 35,000 shares authorized) Common stock ($1 par value, 750,000 shares authorized) Additional paid-in capital, preferred stock Additional paid-in capital, common stock Retained earnings Treasury stock--common (10,000 shares, at cost) $ 800,000 500,000 30,000 2,000,000 1,650,000 60,000 P8 Co During 2011, Classi Clothing Corporation engaged in the following transactions: Issued 10.000 shares of common stock for S6 per share Purchased 10,000 additional shares of common treasury stock at 5 per share Declared the annual cash dividend on preferred stock, payable Declared a $0.55 per share cash dividend to common stoc payable December 31, 2011 January 1 April 1 June 1 June 30 Reg 1. 2. 3. Net income for the year was $940,000. Requirements 1. Show each of the transactions in the accounting equation. are the shareholders equity section of the balance sheet at December 31, 2011 Calculate return on common stockholders equity for the year ended December 31

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.

Expert Answer

 

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

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