Intermediate Accounting II

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Assignment Details

In the unit 2 assignment, we will record transactions that impact the equity section of the balance sheet. Corporations raise capital by selling stock in the corporation. The stockholders’ equity section contains a common stock account and an additional paid-in capital account.  When stock is sold, the common stock account is credited for the par value of the stock sold and the additional paid-in capital is credited for the amount greater than par. Corporations can also issue a class of stock which typically carries unique features.  This stock is known as preferred stock. Finally, corporations can declare dividends during the accounting period. Dividends represent payouts of a corporation’s earnings.  Dividends are declared by the corporation’s Board of Directors.  Dividends can be in various forms including cash, property, liquidating, and stock dividends.

You will provide the journal entry to record issuing of common stock shares by a corporation, record issuing of cumulative preferred stock, and record a declaration of stock split. 

The unit 2 project has two parts.

Part 1:

Company A 

During 2018, Company A has the following transactions involving its common and preferred stock:

• Issued 20,000 shares of $8 par common stock for $26 a share; brings total shares outstanding to 50,000 shares  


• Issued 6,000 shares of $100 par, 6%, cumulative preferred stock for $150 per share  


• When market value of the common stock reached $15 a share, Company A declared a 3-for-1 stock split, reducing the par value to $188 per share 
  
  The following is required:
  
  1. Prepare a journal entry for each transaction. 
  
  2. Discuss the right of shareholders of capital stock for company A that they are entitled to. 
  
  3. Company A is formed as a corporation and therefore, its shareholders have limited liability. Limited liability means that stockholders can only lose the amount of their investment. Discuss how this limited liability affects a corporation.  

Part 2:

Company B

Company B began 2018 with a $110,000 balance in retained earnings. The following events occurred during the year:

• Cash dividends of $18,500 were declared.  


• 4,500 shares of callable preferred stock were recalled and retired for a price of $225 per share. The stock was originally issued for $150 per share.  


• Net income was $550,000.  


• A material error in net income for a previous period was corrected. The correction of the error decreased retained earnings by $18,500 after a related income tax. 
  
  The following is required:
  
  1. Prepare the statement of retained earnings for the year ended 2013, and any note disclosures separately. 
  
  2. Discuss the restriction of retained earnings that the board of directors can impose and why it would be necessary. 

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