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Stocks, Equity and Journal Entries

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The Cosmo Company was started by issuing 800 shares of $10 par value stock at an average market price of $20 per share. The company repurchased 100 shares at a market price of $15 per share. The company later sold 50 shares at a market price of $25 per share. At the end of the first year of operations the company has $2,600 of retained earnings in addition to its contributed capital.

a. Prepare journal entries to record the treasury stock transactions.

b. Prepare the equity section of the balance sheet for Cosmo Company.

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(A)

We would need to record the transactions as follows:

Treasury stock 1500 (100 x 15)
Cash 1500

Cash (50 x 25) ...

Solution Summary

This solution prepares journal entries to record treasury stock transactions for Cosmo Company. This solution also prepares the equity section of the balance sheet. All work and calculations are shown and explained. Includes 1 reference.

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Prepare Equity Journal Entries

A:

Prepare journal entries to record the following four separate issuances of stock:

1. Two thousand shares of no-par common stock are issued to the corporation's promoters in exchange for their efforts, estimated to be worth $30,000. The stock has no stated value.

2. Two thousand shares of no-par common stock are issued to the corporation's promoters in exchange for their efforts, estimated to be worth $30,000. The stock has a $1 per share stated value.

3. Four thousand shares of $10 par value common stock are issued for $70,000 cash.

4. One thousand shares of $100 par value preferred stock are issued for $120,000 cash.

B:

On June 30, 2005, Scizzory Corporation's common stock is priced at $31 per share before any stock dividend or split, and the stockholders' equity section of its balance sheet appears as follows:

Common stock?$10 par value, 60,000 shares
authorized, 25,000 shares issued and outstanding . . . . . . . . . . . . $250,000
Contributed capital in excess of par value, common stock . . . . . . . 100,000
Total contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,000
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $680,000

1. Assume that the company declares and immediately distributes a 100% stock dividend. This event is recorded by capitalizing retained earnings equal to the stock's par value. Answer these questions about stockholders' equity as it exists after issuing the new shares:
a. What is the retained earnings balance?
b. What is the amount of total stockholders' equity?
c. How many shares are outstanding?

2. Assume that the company implements a 2-for-1 stock split instead of the stock dividend in part 1. Answer these questions about stockholders' equity as it exists after issuing the new shares:
a. What is the retained earnings balance?
b. What is the amount of total stockholders' equity?
c. How many shares are outstanding?

3. Explain the difference, if any, to a stockholder from receiving new shares distributed under a large stock dividend versus a stock split.

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