Accounting principles workbook

VIETNAM NATIONAL UNIVERSITY OF AGRICULTURE Authors: PHI THI DIEM HONG | TRAN THI THUONG ACCOUNTING PRINCIPLES WORKBOOK (Advanced Program) VIETNAM NATIONAL UNIVERSITY OF AGRICULTURAL PRESS - 2022 ii PREFACE As cross-border among different countries, the globalization that influence on all business activities, is taking place at an ever more rapid anywhere The famous business failures that have been reported in the press in the pass are good realizable evidences to demonstrate the importance of business activity analysis and proper recording of transactions If the financial information, as the financial reports, of a business entity are to properly represent the results of operations and the financial condition of the company, the transactions must be analyzed and recorded in the accounts following generally accepted accounting principles Therefore, the accounting technics are important not only to accounting majors but also to anyone entering or engaged in a business career to become managers because the ultimate effects of these book entries are reflected in the financial statements If the assets, liabilities and their related expenses are excluded from the financial reports, or reported revenues are recognized prematurely or not really exist, the financial statements are misleading The information in financial statements are only useful and meaningful in case they are fair and clearly represent the business events of the company Accounting and its information are always useful for all enterprises or one who would like manage or use economic resources or engage in other economic activity to make business decision Accounting Principle is a course of study that provides the principles and techniques that accounts employ in measuring, processing, evaluating and communicating information about the financial performance and position of a business This courses supplies learners the “language of business” or the learners understand business terms and concepts used in making decisions If the learners understand how accounting information is issued, the learners will be in an even stable position when faced with a management decision based on accounting information In order to help the learners as students to develop an understanding of a range of theoretical and practical techniques used in to participate more effectively, this book has been issued not only as students‟ workbook but also the training material Throughout the book is the questions and exercise examples taken from everyday life to relate an accounting concept being introduced or discussed to students' experiences From this, the aim of book is introducing the fundamental principles and practices of accounting and developing skills and attitudes useful for learners in much of dynamic business situations This edition contains a total of 10 chapters with most of the contents were expressed under United States Generally Accepted Accounting principles (US-GAAP) as purpose of advanced program that does enrich knowledge of learners at least in comparing with other GAAP (including Vietnam accounting standards) Each chapter of iii first edition has three sections: (i) the brief summary of core terminology and definitions that allow students to review all major concepts covered to that point; (ii) form of questions and exercises sample that is one of the most important section of book to explain how to solve or find the answers of the chapter questions, exercises available; and (iii) question and exercise practice that is the largest sections of end-of-chapter questions, exercises, and problems available All end-of-chapter exercises and questions have been traced back to the chapter explanation to ensure that nothing is asked of a student that does not appear in the book with key answers Each exercise or question becomes more prominent in the business literature and in practice for learners studying on accounting law and regulation, assumed, greater responsibility for preventing and detecting fraud In especially, this book differs from others in a design of comprehensive single reference source for understanding current accounting principles and reporting issues It is directed to accounting learners, trainers or other preparers and users of accounting information Its presentation and format assists strongly the quick comprehension of complex accounting-related subjects updated for today‟s rapidly changing business environment All of those sources of accounting guidance are prepared and discussed directly by authority groups, Dr Phi Thi Diem Hong and Dr Tran Thi Thuong, who are working in Financial Accounting Department, Faculty of Accounting and Business Management In which, the both of authors have tried their efforts of their fields in accounting teaching or researching and working, not only normal but also advanced program in university and enterprises, however, it is difficult to be perfected as willing as Therefore, we are so happy to receive the supporting comments from the readers who are any of our students, colleagues, accounting professors or researchers in the world in order to best in next editions Acknowledgements: The whole book would not have seen the light of the day without the help of so many wonderful colleagues in Faculty of Accounting and Business Management who have helped us to comprise all ideas and content together We also wish to place our sincere appreciation of the untiring efforts of commentators for her/his thorough technical review of the entire manuscript He/She inviable comments have all been take into account in writing this book Authors Phi Thi Diem Hong Tran Thi Thuong iv CONTENTS Chapter INTRODUCING ACCOUNTING IN BUSINESS 1.1 ACCOUNTING IN BUSINESS REVIEWS 1.1.1 Accounting and Accounting activities 1.1.2 Accounting Principles 1.1.3 Accounting Equation 1.1.4 Accepted accounting terminology 1.1.5 Financial Statements 1.2 MULTI-CHOICE QUESTIONS AND EXERCISES SAMPLE 1.2.1 Multiple-choice questions sample 1.2.2 Exercises sample 1.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 12 1.3.1 Practical Multiple-choice questions 12 1.3.2 Practical Exercises 15 1.3.3 Key answers 22 Chapter ANALYZING AND RECORDING TRANSACTIONS 28 2.1 ANALYZING AND RECORDING TRANSACTIONS REVIEWS 28 2.1.1 Analyzing and recording process 28 2.1.2 Double entry accounts 30 2.1.3 Trial balance sheets 30 2.2 EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE 31 2.2.1 Multiple-choice questions sample 31 2.2.2 Exercises sample 34 2.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 39 2.3.1 Practical Multiple-choice questions 39 2.3.2 Practical Exercises 43 2.3.3 Key answers 51 Chapter ADJUSTING ACCOUNTS AND PREPARING FINANCIAL STATEMENTS 60 3.1 ADJUSTING ACCOUNTS AND PREPARING FINANCIAL STATEMENT REVIEWS 60 3.1.1 Accrual Basis of Accounting 60 v 3.1.2 Adjusting entries 60 3.1.3 Preparing Financial statements 61 3.2 EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE 63 3.2.1 Multiple-choice questions sample 63 3.2.2 Exercises sample 66 3.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 72 3.3.1 Practical Multiple-choice questions 72 3.3.2 Practical Exercises 77 3.3.3 Key answers 83 Chapter ACCOUNTING FOR MERCHANDISING OPERATIONS 93 4.1 MERCHANDISING OPERATION REVIEWS 93 4.1.1 Merchandising activities 93 4.1.2 Accounting for Merchandise 94 4.2 EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE 100 4.2.1 Multiple-choice questions sample 100 4.2.2 Exercises sample 103 4.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 105 4.3.1 Practical Multiple-choice questions 105 4.3.2 Practical Exercises 110 4.3.3 Key answers 114 Chapter INVENTORY AND COST OF GOODS SALES 121 5.1 INVENTORY AND COST OF GOODS SALES REVIEWS 121 5.1.1 Inventory 121 5.1.2 Cost of Goods sold 123 5.1.3 Accounting for Inventory 123 5.2 EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE 123 5.2.1 Multiple-choice questions sample 123 5.2.2 Exercises sample 126 5.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 129 5.3.1 Practical Multiple-choice questions 129 5.3.2 Practical Exercises 136 5.3.3 Key answers 140 vi Chapter ACCOUNTING FOR RECEIVABLE 147 6.1 ACCOUNTING FOR RECEIVABLE REVIEWS 147 6.1.1 Definition 147 6.1.2 Accounting for Receivable 148 6.1.3 Uncollectible Accounts and Bad Debt 149 6.2 EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE 152 6.2.1 Multiple-choice questions sample 152 6.2.2 Exercises sample 153 6.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 157 6.3.1 Practical Multiple-choice questions 157 6.3.2 Practical Exercises 162 6.3.3 Key answers 166 Chapter LONG-TERM ASSETS 173 7.1 LONG-TERM ASSETS REVIEWS 173 7.1.1 Cost of Long-term Assets 173 7.1.2 Computing and Recognition Depreciation 175 7.1.3 Accounting for Disposal of Long-term Assets 177 7.1.4 Accounting for Selling Long-term Assets 177 7.2 EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE 178 7.2.1 Multiple-choice questions sample 178 7.2.2 Exercises sample 181 7.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 182 7.3.1 Practical Multiple-choice questions 182 7.3.2 Practical Exercises 188 7.3.3 Key answers 192 Chapter CURRENT LIABILITIES 200 8.1 CURRENT LIABILITIES REVIEWS 200 8.1.1 Concepts underlying Current Liabilities 200 8.1.2 Accounting for Current Liabilities 201 8.2 EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE 202 8.2.1 Multiple-choice questions sample 202 8.2.2 Exercises sample 203 vii 8.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 205 8.3.1 Practical Multiple-choice questions 205 8.3.2 Practical Exercises 210 8.3.3 Key answers 212 Chapter LONG-TERM LIABILITIES 217 9.1 LONG-TERM LIABILITIES REVIEWS 217 9.1.1 Concepts underlying long-term liabilities 217 9.1.2 Accounting for long-term liabilities 218 9.2 EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE 219 9.2.1 Multiple-choice questions sample 219 9.2.2 Exercises sample 221 9.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 222 9.3.1 Practical Multiple-choice questions 222 9.3.2 Practical Exercises 226 9.3.3 Key answers 228 Chapter 10 SHAREHOLDER’S EQUITY 232 10.1 SHAREHOLDER‟S EQUITY REVIEWS 232 10.1.1 Shareholder‟s Equity 232 10.1.2 Accounting for the shareholder‟s Equity 233 10.2 EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE 234 10.2.1 Multiple-choice questions sample 234 10.2.2 Exercises sample 236 10.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 239 10.3.1 Practical Multiple-choice questions 239 10.3.2 Practical Exercises 243 10.3.3 Key answers 245 REFERENCES 250 viii Chapter INTRODUCING ACCOUNTING IN BUSINESS 1.1 ACCOUNTING IN BUSINESS REVIEWS 1.1.1 Accounting and Accounting activities Anyone probably will find that of all the business knowledge that have acquired or will learn, the accounting study will be the most useful The financial and economic decisions as not only a student or consumer but also anyone involve accounting information For individual situation, relating income tax profile, accounting information helps determine his/her taxes payable Understanding the accounting discipline also can influence many of his/her future occupational decisions Nobody cannot stand out of the accounting information effects on his/her personal and occupational life Every profit-seeking business organization such as money, inventory, machinery, and other assets, uses accounting information For this reason, accounting is called the language of business Accounting also serves as the language providing financial information about not-for-profit organizations such as hospitals, charities, churches, etc but this book concentrates on accounting in business Accounting in Business is a system that identifies, records and communicates an financial information of an business entity to a wide range of potential users in making decisions In other words, accounting is a link between business activities and decision makers Accounting activities like a cycle following the business cycle as bellowed: (i) Accounting identifies the business activities by recording and then processed to become useful information, after that communicated through accounting reports to decision makers (ii) Data about business activities or transactions are the input to the accounting system, and useful accounting information for decision makers is the output Normally, there are following four major decision types that managers can use accounting information to make sound decisions: (i) Financial decisions mention to what amounts of capital (funds) are needed to run the business and whether to keep safety these funds from owners (stockholders) or creditors In this sense, the company capital means money used to purchase resources such as machinery, merchandises, and buildings and to pay expenses of operating the business (ii) Resource allocation decisions relate how the total company capital is to be invested, for example the amount to be invested in building (iii) Production decisions focus on what kinds of product are to be produced, by when and what means (iv) Marketing decisions are setting prices of selling and budgets of advertising or the location of a company's markets and how to reach them 1.1.2 Accounting Principles Accounting information has been required relevant, reliability and comparable in order to satisfy being useful for all users Unfortunately, the accounting information quality is strongly depended on the accountants‟ ethical The ethical behavior mentions more than merely making sure you are not violating a code of ethics Most people sense what is right and wrong, but yet get-rich-quick opportunities can tempt many of us In fact, the greed won out over their sense of right and wrong Therefore, it is necessary setting a principles or general accepted accounting principles (GAAP) for accounting activities On the other word, the accounting principles are the important contents to keep the accounting practical body Depending on different condition of nation, each country has different GAAP body that has been accepted and promulgated in whole domestic area Some of developed countries, as United Sated, United Kingdom, Australia, set a principle system that has been accepted voluntary in other countries In this book, focusing on the learners of advanced program, there are three main concepts of GAAP including International Financial Report Standards (IFRSs); United Sated-General Accepted Accounting Principles (US-GAAP); and Vietnamese Accounting Standards (VASs) in table 1.1 as bellows: Table 1.1 Accounting Principles following IFRSs, US-GAAP and VASs No IFRSs (IAS 01) US-GAAP VASs (VAS01) Fair value Cost principle Historical cost Comparable Revenue recognition Prudence Going-concern Going-concern Continuous operation Consistency Business entity Consistency Off-setting Matching Matching Accrual basis Monetary unit Accrual basic Materiality Full disclosure Materiality The table 1.1 shows that there are different entitles of principles in different countries, but there are many similar points among relevant regulations of three systems respectively Dec Sold 4,000 shares of the treasury stock at $11 per share Required: Journalize the transactions Prepare the stockholders‟ equity section assuming the company had retained earnings of $200,000 at December 31 Solution: January 12 Dr Organization Expense Cr Common stock (4,500 × $5) $4,050,000 $2,250,000 Cr Paid-in Capital in Excess of Par common Stock $1,800,000 June Dr Land (150,000 × $8.5) $1,275,000 Cr Common stock (150,000 × $5) $750,000 Cr Paid-in Capital in Excess of Par common Stock $525,000 Oct 10 Dr Treasury Stock (20,000 × $9) Cr Cash (20,000 × $9) $18,000 $18,000 Dec Dr Cash (4,000 × $11) Cr Treasury Stock Cr Paid in Capital from Treasury Stock $44,000 $36,000 $8,000 Prepare the stockholders‟ equity section assuming the company had retained earnings of $250,000 at December 31 Rolftech Corporation STOCKHOLDERS‟ EQUITY REPORT Stockholders‟ equity 1.1 Paid in Capital Capital stock Common stock, $5 par value, 1,000,000 shares authorized, 600,000 shares issued, 584,000 shares outstanding (600,000 shares issued-purchase of 20,000 share + sold of 4,000 shares) 238 $3,000,000 1.2 Additional paid-in capital In excess of par-common stock ($1,800,000 + $525,000) From treasury stock ($44,000 − $36,000) $2,325,000 $ 18,000 Total additional paid in capital ($2,325,000 + $18,000) $2,361,000 1.3 Total Paid in capital ($3,000,000 + $2,361,000) $5,361,000 Retained earnings $250,000 Total paid-in capital and retained earnings = (1) + (2) $5,611,000 Les: Treasury stock (16,000 = 20,000 − 4,000) × $9 $(144,000) Total stockholders‟ equity $5,467,000 10.3 PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS 10.3.1 Practical Multiple-choice questions A person who purchases common stock of a corporation is called: A A customer C A supplier B A bond holder D A common stockholder A person who purchases preferred stock (or preferred shares, preference shares) of a corporation is called: A A preferred owner C A preferred creditor B A preferred stockholder D A preferred investor Which of the following statements is not true about a preferred stock? A Preferred stockholders have a higher claim to dividends or asset distribution than common stockholders B Stockholders always have a voting right C In the event of a liquidation, preferred stockholders claim on assets is greater than common stockholders but less than bondholders D Preferred stock has characteristics of both bonds and common stock which enhances its appeal to certain investors Who is called as the real owner of the corporation? A A creditor C A Common stockholder B A bondholder D A director 239 Which of the following statement is correct? A Redeemable preferred stock is a type of preferred stock B Redeemable preferred stock allows the issuer to buy back the stock at a certain price and retire it C Redeemable preferred stock converts the stock to treasury stock D All of these answers The shares of common and preferred stock that have been issued and outstanding are reported as A Current assets in balance sheet B Fixed assets in balance sheet C Stockholders‟ equity in balance sheet D Current liabilities in balance sheet Which of the following statement is correct? A Common stock is a security that represents ownership in a corporation B Holders of common stock elect the board of directors and vote on corporate policies C In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid D All of these answers On April 22, 20X9, Southern Corporation issued 4,500 shares of its $10 par value common stock These shares were issued at a price of $25 per share The correct journal entry to record this transaction is: A Dr Cash: $112,500/ Cr Common stock: $112,500 B Dr Cash: $45,000/ Cr Common stock: $45,000 C Dr Common stock: $45,000 Dr Additional paid-in capital Common stock: $67,500 Cr Cash: $112,500 D Dr Cash: $112,500 Cr Common stock: $45,000 Cr Additional paid-in capital Common stock: $67,500 On July 2, 20X8, DJ Inc sold 2,000 shares Each common stock has a $10 par value and a market price of $35 per share The journal entry for this transaction would include a: 240 A Debit to Cash for $20,000 B Credit to Common Stock for $20,000 C Debit to Paid-in Capital in Excess of Par Value, Common for $50,000 D Credit to Common Stock for $70,000 10 On August 23, 20XX1, EW Corporation exchanged 2,500 shares of its $10 par value common stock for building with a fair market value of $43,000 On August 23, 20XX1, EW’s common stock was selling for $30 per share The building would be recorded on EW’s books at: A $25,000 B $43,000 C $75,000 D $100,000 11 When an entity buyback their own shares at a certain price which are known as: A Holding stock C Acquired stock B Common stock D Treasury stock 12 Which of the following is a correct statement about treasury stock? A Shares held as treasury stock are not entitled to dividends B Shares held as treasury stock are not entitled to assets upon liquidation C Shares held as treasury stock has no voting right D All of these answers 13 The USJ Corporation repurchased its own shares of common stock The relevant information is given below: Number of shares repurchased: 6,000 shares Par value per share of USJ Company: $10 The price at which shares were repurchased: $25 per share Based on the above information, the journal entry to record the repurchase of 5,000 shares under cost method would be: A Dr Treasury stock $60,000; Cr Cash $60,000 B Dr Treasury stock $150,000; Cr Cash $150,000 C Dr Common stock $60,000; Cr Cash $60,000 D Dr Common stock $150,000; Cr Cash $150,000 14 This corporation has some accounting information: Total assets: $22,500,000 Net income: $3,900,000 Stockholders‟ equity: $16,000,000 241 Preferred stock: $1,000,000 Number of shares of common stock outstanding: 1,500,000 Number of shares of preferred stock outstanding: 250,000 Book value per share of common stock = ? A $15 B $2.6 C $10 D $64 15 Market price of preferred stock will be influenced by A Rate of dividend B Features of preferred stock C Rate of interest on debt securities D All of the above 16 Treasury stock is a contra equity account, and has balance A Credit C Both debit and credit B Debit D None of these answers 17 The following information has been extracted from the balance sheet of LLD Corporation as on December 31, 20XX: Total stockholders‟ equity: $35,000,000 Preferred stock (issued and outstanding): $15,000,000 Average number of shares of common stock outstanding: 2,000,000 shares On the basis of above information, the book value per share of common stock is: A $10 B $25 C $7.5 D $17.5 18 YD Corporation earned $400,000 last year in after-tax profits This enterprise had 200,000 common shares outstanding and retained earnings of $1,600,000 at the yearend Calculate the value of earnings per share for this enterprise A $400,000 B $8 C $2 D $4 19 Mr Minh contributed some assets and liabilities to NH Corporation, as follows: Cash of $18,000; Inventories of $2,000; Equipment with the original cost of $25,000 and a fair market value of $21,500; Note Payable of $4,500 Calculate the capital of Mr Minh in NH Corporation A $37,000 B $40,500 C $41,500 D $45,000 20 TT Corporation had 160,000 shares of common stock outstanding on January 1, 20XX Then, this corporation sold 40,000 additional shares on March 30, 20XX The net income of this corporation for 20XX was $660,000 Calculate the earnings per share 242 A $4.13 B $3.3 C $16.5 D $5.5 21 On January 1, 20XX, HL Corporation had 400,000 shares of $1 par common stock outstanding The opening balance of retained earnings was $5,200,000 During 20XX, this corporation earned $1,780,000 and paid a dividend of $2 per share in cash for stockholders Calculate the retained earnings at the end of 20XX? A $5,200,000 C $6,980,000 B $1,780,000 D $6,180,000 10.3.2 Practical Exercises Exercise 1: GA Corporation began operations in January, 20X1 Total shareholders' equity at that time was $271,000 On December 31, 20X1, total assets of GA Corporation $540,000, and liabilities of $118,000 Required: Compute the amount of shareholders' equity at December 31, 20X1 Has shareholders' equity increased or decreased? Give several possible explanations for the change in shareholders' equity What items make up shareholders' equity? Exercise 2: Using the information given, calculate the missing amount in each of the independent cases below: Item A B C Current Assets $28,500 $ $43,500 Non-current Assets $69,300 $61,200 $197,500 Current Liabilities $20,300 $22,500 $ Non-current Liabilities $19,000 $32,500 $43,500 Contributed Capital $ $30,700 $97,500 Retained Earnings $14,000 $ $43,500 Shareholders' Equity $ $55,700 $ Exercise 3: Prepare journal entries to record each of the following independent stock issue situations PG Corporation issued 250,000 shares of $10 par value common stock The issue price was $19 per share 243 YR Corporation issued 60,000 shares of 40 par value preferred stock The issue price was $66 per share AB Corporation issued 15,000 shares of $10 par value common stock for land with a fair value of $260,000 MK Company purchased 300 shares of its own $100 par common stock for $115 The stock was subsequently sold in three transactions: 150 shares at $120, 50 shares at $108 and 100 shares at $110 Exercise 4: AE Corporation had some information The fiscal year of this corporation ends on December 31 every year The net income for 20X1 was $1,530,000 before considering the influence of dividends (if any) The net income for 20X2 was $1,880,000 before considering the influence of dividends (if any) On November 15, 20X1, this corporation declared that the dividends were $615,000 The dividends were recorded on January 15, 20X2 On February 1, 20X2, the dividends were paid in cash to stockholders On January 1, 20X1, stockholders‟ equity was $4,100,000 No transaction affected stockholders‟ equity during the period 20X1-20X2 except for the transactions relative to retained earnings and dividends Required: Prepare journal entries to reflect the transactions on November 15, 20X1 (the dividend declaration), January 15, 20X2 (the date of record), and February 1, 20X2 (the date of payment) Calculate net income of this corporation in 20X1 and 20X2 Calculate total equity at the end of 20X1 and 20X2 Is total “working capital” decreased on November 15, 20X1 (the dividend declaration), January 15, 20X2 (the date of record), and February 1, 20X2 (the date of payment)? Exercise 5: GL Corporation sold 15,800,000 shares Each common stock has a $10 par value and a market price of $15 per share This corporation also has cumulative preferred stock outstanding with 600,000 shares of $50, 6% These preferred stocks were originally issued at $10 par value During 20X1, this corporation faced difficulties in 244 business and unpaid dividends Before the year 20X1, the preferred shareholders had always received the expected dividend Required: How much is the company‟s legal capital, additional paid-in capital, and total paid-in capital? What accounting/disclosure is needed relating to the dividends in arrears on the preferred stock as of the end of 20X1? Exercise 6: The equity structure of ZR Corporation as follows: common stock = $33,000,000 (at $5 par value); paid-in capital excess of par = $96,000,000; and retained earnings = $59,900,000 Because of the market influence, this corporation guessed that its share price decreased The director's board of ZR Corporation decided to reacquire 900,000 shares of common stock These treasury shares were bought at $15 per share After the transaction (1), the stock price of this corporation increased to $18 per share, and ZR Corporation decided to sell 450,000 treasury shares in the market After the transaction (2), ZR Corporation faced difficulties in business, hence, they decided to sell the remaining treasury shares to raise additional cash The selling price of each share was $8 Required: Assuming that all 12,900,000 shares of ZR were issued at the same time and at the same price per share, what was the original issue price? How this compare to the price does paid in Transaction 1, and is it rational for a company to pay more to buy back shares than it originally received upon the initial issuance? Prepare an appropriate journal entry to record Transaction (1) ZR records treasury shares at cost Prepare an appropriate journal entry for Transaction (2) Prepare an appropriate journal entry for Transaction (3) 10.3.3 Key answers 10.3.3.1 Practical Multiple-choice questions 10 11 D B B C D C D D B C D 12 13 14 15 16 17 18 19 20 21 D B C D B A C A B D 245 10.3.3.2 Practical Exercises Exercise 1: Compute the amount of shareholders' equity on December 31, 20X1 Assets on Dec 31, 20X1 $540,000 Less: Liabilities on Dec 31, 20X1 $118,000 Shareholders' Equity on Dec 31, 20X1 $422,000 Shareholders' equity has increased by $151,000 = $422,000 − $271,000 during the period, January to December 31 The $151,000 increase may result from the company earning net income and paying no dividends or earning net income and paying dividends; or the shareholders may have made additional purchases of the company's stock; or a combination of the above-mentioned changes might explain the increase Contributed capital represents the assets provided by the shareholders in exchange for an ownership interest in the firm Retained earnings represents the earnings or profits, realized by the firm since its formation in excess of dividends distributed to shareholders Exercise 2: Current Assets + Non-current Shareholders‟ Current + + Assets = Equity Liabilities Non-current Liabilities Shareholders‟ Equity = Contributed Capital + Retained Earnings Item A B C Current Assets $28,500 $49,500 $43,500 Noncurrent Assets $69,300 $61,200 $197,500 Current Liabilities $20,300 $22,500 $56,500 Noncurrent Liabilities $19,000 $32,500 $43,500 Contributed Capital $44,500 $30,700 $97,500 Retained Earnings $14,000 $25,000 $43,500 Shareholders' Equity $58,500 $55,700 $141,000 Exercise 3: To record issue of 250,000 shares of $10 par value common stock at $19 per share Dr Cash Cr Common stock $4,750,000 $2,500,000 Cr Paid in Capital in Excess of Par per Common stock $2,250,000 246 To record issue of 60,000 shares of $40 par value preferred stock at $66 per share Dr Cash $3,960,000 Cr Preferred Stock $2,400,000 Cr Paid in Capital in Excess of Par per Preferred Stock $1,560,000 To record issue of 15,000 shares of $10 par value common stock for land with a fair value of $260,000 Dr Land $260,000 Cr Common Stock $150,000 Cr Paid in Capital in Excess of Par per Common Stock $110,000 Purchase of treasury stock of MK Company Dr Treasury stock 300 × $115 = $34,500 Cr Cash $34,500 Sale of 150 shares at $120 per share Dr Cash 150 × $120 = $18,000 Cr Treasury stock $17,250 Cr Paid-in capital-treasury stock $750 Sale of 50 shares at $108 per share Dr Cash 50 × $108 = $5,400 Dr Paid-in capital-treasury stock $350 Cr Treasury stock $5,750 Sale of 100 shares at $110 per share Dr Cash 100 × $110 = $11,000 Dr Paid-in capital-treasury stock Cr Treasury stock $1,500 $11,500 Exercise 4: Prepare journal entries: November 15, 20X1 Date of declaration means the date when the directors' board approved a motion declaring “payment dividends to stockholders” This will lead the appearance of dividends payable (a liability) of this corporation  To record Dividends Declaration: 247 Dr Dividends Cr Dividends Payable January 15, 20X2 $615,000 $615,000 Date of record means the directors' board sets up the date of record which indicates list of stockholders will receive dividends  The date of record: No entry February 1, 20X2 Date of payment means the date of payment indicates when the corporation will pay dividends to the stockholders  To record payment of previously declared dividends: Dr Dividends Payable Cr Cash $615,000 $615,000 The dividends not affect net income Because dividends are distribution from corporation's earnings to corporation's shareholders, dividends are not expense of the corporation Net income for 20X1 is $1,530,000 Net income for 20X2 is $1,880,000 Total equity on December 31, 20X1 is $5,015,000 Equity $4,100,000 Beginning Balance $615,000 Dividends Declared $1,530,000 Net Income $5,015,000 Ending Balance Total equity on December 31, 20X2 is $6,895,000 Equity $5,015,000 Beginning Balance $1,880,000 Net Income $6,895,000 Ending Balance Working capital is decreased on the date of declaration because of the appearance of dividends payable (it is recorded as a current liability) On the date of record, the value of working capital is unaffected On the date of payment, both cash (current assets) and dividends payable (current liabilities) decreased by the same amount, hence, the value of working capital is unaffected Exercise 5: GL Corporation has 15,800,000 shares of $10 par value common stock outstanding 248 Compute the company‟s legal capital, additional paid-in capital, and total paidin capital: Legal capital = $188,000,000 Additional Paid-in capital = $79,000,000 Total paid-in capital = $267,000,000 An enterprise would prepare a footnote to the financial statements to show any dividends in arrears Hence, in case of GL Corporation the value of dividends in arrears = $1,800,000 = 600,000 × $50 × 6% However, if the declaration of dividends has not yet approved, a liability (dividends payable) will not record Hence, dividends in arrears are not a liability of the corporation Exercise 6: The equity structure of ZR Corporation as follows: common stock = $33,000,000 (at $5 par value); paid-in capital excess of par = $96,000,000; and retained earnings = $59,900,000 The original issue price of 12,900,000 shares was $129,000,000 = $33,000,000 + $96,000,000  The market price per share = $129,000,000/12,900,000 = $10 per share  This price is significantly lower than the reacquisition price ($15 per share) in transaction However, this situation can be accepted because the corporation can issued their stocks in market long time ago Through the development period, the corporation achieved high retained earnings (such as retained earnings = $59,900,000) Therefore, the value of the corporation will increase considerably To record acquisition of 900,000 treasury shares at $15 per share Dr Treasury Stock Cr Cash $13,500,000 $13,500,000 To record reissue of 450,000 treasury shares at $18 per share Dr Cash $8,100,000 Cr Treasury Stock $6,750,000 Cr Paid-in Capital Excess of Par $1,350,000 To record reissue of 450,000 treasury shares at $8 per share Dr Cash $3,600,000 Dr Paid-in Capital in Excess of Par $3,150,000 Cr Treasury Stock $6,750,000 249 REFERENCES Barry E., & Jamie, E., (2011) Financial Accounting and Reporting, Prentice-Hall Retrieved from http://www.koledza.lv/best/download/biblioteka/Financial_Accounting.pdf on July 15, 2021 Jerry J Weygandt, Paul D Kimmel & Donald E Kieso (2012).Accounting Principles, John Wiley & Sons, Available at: www.bhuiyanacademyedu.com/e-book/Accounting%20 PrinciplesX.pdf on July 15, 2021 Jerry J Weygandt, Paul D Kimmel & Donasld E Kieso (2018) Accounting Principles John Wiley & Sons p 1376 ISBN: 1119410959, ISBN: 9781119410959 John Wild & Ken Shaw (2018) Fundamental Accounting Principles 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