Finishing Touches has two classes of stock authorized: 8%, $10 par preferred, and $1 par value common. The following transactions affect stockholders' equity during 2015, its first year of operations:

January 2 Issues 100,000 shares of common stock for $35 per share.
February 6 Issues 3,000 shares of 8% preferred stock for $11 per share.
September 10 Repurchases 11,000 shares of its own common stock for $40 per share.
December 15 Reissues 5,500 shares of treasury stock at $45 per share.

In its first year of operations, Finishing Touches has net income of $160,000 and pays dividends at the end of the year of $94,500 ($1 per share) on all common shares outstanding and $2,400 on all preferred shares outstanding.

Required:
Prepare the stockholders' equity section of the balance sheet for Finishing Touches as of December 31, 2015. (Amounts to be deducted should be indicated by a minus sign.)

FINISHING TOUCHES
Balance Sheet
(Stockholders’ Equity Section)
December 31, 2015
Stockholders’ equity:
Common stock
Preferred stock
Treasury stock
Additional paid-in capital
Total paid-in capital
Retained earnings
Treasury stock
Total stockholders’ equity

a) 100,000 Common stock issued at $35 per share with $1 par is valued at $1 in the Common Stock section while the difference $34 $(35 - 1) is taken to the Additional paid-in capital at 100,000 x $34.

b) 3,000 Preferred Stock issued at $11 per share with $10 par is valued at $10 in the Preferred Stock while the difference $1 $(11 - 10) is taken to the Additional paid-in capital at 3,000 x $1.

c) Treasury stock is the repurchase of stock by the company. It is a contra account to the equity accounts. It is therefore deducted from the equity section. Two methods exist for its treatment: the cost method and the par value treatment. We used the par value treatment.

This involves stating the par value movements in the Treasury stock while the additional loss or additional gain is taken to the Additional Paid-in Capital section.

On the other hand, the cost method treats the cost of repurchase in the Treasury stock.

d) Additional Paid-in Capital (APIC) account records the above par value received. It is also where the above par value is deducted for Treasury Stock.

e) Retained Earnings represent the net income after paying dividends to common stockholders and preferred stockholders.

f) To get the total stockholders' equity, the preferred stock is deducted. Holders of preferred stock are not equity holders.

codiepienagoya codiepienagoya · Answer 2 · 2021-11-24T10:38:50+01:00

Following are the calcultion to the given points:

The shareholders' equity portion of F T's balance sheet as of December 31, 2015, must be formulated as follows:

[tex]A \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ B\\\\[/tex]

[tex]\ \ \ \ \ \ \ \ \ \ \ \ \ \ FT \\\\ \\\\[/tex]

[tex]\text{ Balance Sheet (Stockholders' Equity Section)}[/tex]

[tex]\text{ December \ 31, 2015 }[/tex]

[tex]\bold{\text{Stockholders' equity: }}[/tex]

[tex]\text{Common stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ 100,000 \\\\\text{Preferred stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 30,000\\\\ \text{Paid-in capital in excess of par - common stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ 3,400,000 \\\\\text{Paid-in capital in excess of par - preferred stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ 3,000 \\\\ \text{Paid-in capital from trreasury stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 27,500\\\\ \text{Total paid-in capital} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 3,560,500\\\\[/tex]

[tex]\text{Retained earnings} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 63,100\\\\\text{Total paid-in capital and retained earnings} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 3,623,600\\\\ \text{Less : Treasury stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 220,000\\\\ \text{Total stockholders' equity} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 3,403,600 \\\\[/tex]

Following are the formula that is use to calculate the value.

[tex]A \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ B\\\\[/tex]

[tex]\ \ \ \ \ \ \ \ \ \ \ \ \ \ FT \\\\ \\\\[/tex]

[tex]\text{ Balance Sheet (Stockholders' Equity Section)}[/tex]

[tex]\bold{\text{Stockholders' equity: }}[/tex]

[tex]\text{Common stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ =100000 \times 1 \\\\ \text{Preferred stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ =3000 \times 10 \\\\ \text{Paid-in capital in excess of par - common stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ =100000 \times (35-1) \\\\ \text{Paid-in capital in excess of par - preferred stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ =3000\times (11-10) \\\\\text{Paid-in capital from trreasury stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ =5500\times (45-40) \\\\[/tex]

[tex]\text{Total paid-in capital} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ =SUM(B6 : B10) \\\\\text{Retained earnings} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ =160000-94500-2400 \\\\\text{Total paid-in capital and retained earnings} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ =B11+B12 \\\\\text{Less : Treasury stock} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ =(11000-5500)\times 40 \\\\\text{Total stockholders' equity} \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ =B13-B14\\\\[/tex]

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