Question

United Resources Company obtained a charter from the state in January of this year. The charter authorized 200,000 shares of common stock with a par value of $1. During the year, the company earned $590,000. Also during the year, the following selected transactions occurred in the order given:
a. Sold 100,000 shares of the common stock in an initial public offering at $12 cash per share.
b. Repurchased 20,000 shares of the previously issued shares at $15 cash per share.
c. Resold 5,000 of the shares of the treasury stock at $18 cash per share.

Required:
Prepare the stockholders’ equity section of the balance sheet at the end of the year. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Answer:

See explanation.

Explanation:

Shareholders' Equity

Authorized Shares                                                200,000 Shares

Common Stock out standing (85,000 * 1) (w1)     $85,000

Treasury Stock (w3)                                              $15,000

Additional paid in capital  (w2)                             $715,000

Retained earnings                                                  $590,000

                                                                                $1,405,000

Workings

(W1)

Common stock is recorded at par value. Total number of shares outstanding are,

Outstanding = 100,000 - 20,000 + 5000 = 85000 @ $1 each

(W2)

Additional Paid in capital is the premium paid on shares,

In the initial offering of 100,000 shares, $11 per share was paid in thus bringing in a total of $1,100,000.

This amount was then used to repurchase stock

Repurchase deduction = 20,000 * 15 = $300,000

Later the stock re issue brought in a premium of 18 - 1 =$17 per share thus a total of 5000 * 17 = $85,000

This brings the balance of paid in capital as

Paid in capital = 1,100,000 - 300,000 + 85,000 = $715,000,

(W3)

Notice that when we paid for repurchase we paid the par value plus premium, the par value is 20,000 @ $1 =20,000 and after reissue it is reduced to 20,000 - 5000 = 15,000.  This is the amount of treasury stock held, which we deducted from the Additional paid in capital account.

Hope that helps.