After Reading The Information On Stockholders' Equity In Cha ✓ Solved

After reading the information on stockholder's equity in Cha

After reading the information on stockholder's equity in Chapter 18 from your Intermediate Accounting text, use a Word or an Excel document to address the following problems: P 18-1 and P 18-10 from the McCollum Corporation exercises, including journal entries for stockissuance, treasury stock, and retained earnings effects. Part A: Jan. 9—Issued 40 million common shares for $20 per share; Mar. 11—Issued 5,000 shares in exchange for equipment (fair value $20/sh). Part B: Retiring and reissuing treasury shares (cost and accounting). P 18-10: determine the effect on retained earnings for listed transactions, including sale/purchase of stock, dividends, net income/loss, and stock dividends.

Paper For Above Instructions

Introduction and scope. This paper addresses two problems from Chapter 18 of the Intermediate Accounting course—P 18-1 (stock transactions and journal entries related to stockholders’ equity) and P 18-10 (transactions affecting retained earnings). The discussion covers the accounting for common stock issues, the treatment of treasury stock, and the effects that various equity transactions have on retained earnings (RE). The analysis emphasizes the standard journal entries and the rules governing equity components under US GAAP, with notes on how IFRS concepts may differ in areas such as stock dividends and remeasurement of equity instruments. In-text citations reference standard accounting texts and professional guidance to support the treatment of these topics (Kieso, Weygandt, & Warfield, 2019; Kimmel, Weygandt, & Kieso, 2019).

Part A — Journal entries for McCollum Corporation (P 18-1). In a first-year equity transaction, the company is authorized to issue 100 million shares with $1 par value. The journal entries demonstrate the mechanics of recording common stock issued for cash and the issuance of shares in exchange for noncash consideration (equipment). The par value portion of the common stock issuance is recorded to Common stock (par value), while the remainder is recorded to Additional Paid-In Capital (APIC):

  • Jan. 9: Issued 40 million common shares for $20 per share. Journal entry:
    • Dr Cash 800,000,000
    • Cr Common stock (par, 40,000,000 shares × $1) 40,000,000
    • Cr Additional paid-in capital—excess of par 760,000,000
  • Mar. 11: Issued 5,000 shares in exchange for equipment. Market value assumed at $20 per share (shares traded recently at $20):
  • Dr Equipment 100,000
  • Cr Common stock (par 5,000) 5,000
  • Cr Additional paid-in capital—excess of par 95,000

Rationale. The entries reflect the par value of shares issued and the balance of proceeds over par as APIC. When stock is issued for cash, the entire cash proceeds are allocated between par value and APIC; when stock is issued in exchange for noncash assets, asset value is recorded at the fair value of the consideration received or the fair value of the stock issued, whichever is more clearly evident, with the corresponding credit to Common stock and APIC. The treatment aligns with the standard accounting for contributed capital and the separation of par value from additional paid-in capital (Kieso et al., 2019; Kimmel et al., 2019).

Part B — Retiring and restating treasury shares. The scenario describes the company reacquiring its own shares and retiring them, thereby restoring them to authorized-but-unissued status. The general approach to retiring treasury stock is to remove the treasury stock balance from equity and adjust par value and APIC accounts accordingly. The typical journal entry structure is as follows when shares are retired at cost:

  • Dr Common stock (par value of shares retired)
  • Dr APIC—Excess of Par (to the extent of any remaining APIC attributable to the retired shares)
  • Cr Treasury stock (at cost, i.e., the amount paid to reacquire)
  • Dr or Cr Retained earnings for any residual amount to balance the entry, if APIC and par do not cover the cost of retirement

Illustrative example. Suppose McCollum retires 1,000,000 shares of treasury stock that it reacquired at $25 per share, with par value $1 and a remaining APIC balance of $15 million allocated to those shares. The retirement would be recorded as:

  • Dr Common stock (par value of 1,000,000 shares × $1) 1,000,000
  • Dr APIC—Excess of Par (allocated to the retired shares) 14,000,000
  • Cr Treasury stock (cost of 1,000,000 shares × $25) 25,000,000
  • Balance the entry with Dr Retained earnings - to the extent the debit sides exceed the credit sums, if APIC is insufficient to absorb the difference

Notes on alternative scenarios. If the cost of retirement is less than the sum of par value plus APIC related to the shares, there is no need to debit Retained earnings. If the cost exceeds the combined par value plus APIC, Retained earnings must be debited for the shortfall. The key principle is to eliminate the treasury stock balance and reflect any impact on total contributed capital, with RE absorbing any residual balance to maintain accounting equality (Kieso et al., 2019; Kimmel et al., 2019).

Part A and Part B summary. The journal entries for stock issuance and for retirement of treasury stock illustrate how contributed capital is tracked separately from retained earnings. In addition, the headroom in APIC determines whether any RE adjustment is necessary when treasury stock is retired. IFRS considerations would similarly require reclassification of equity components, but the terminology and some mechanics differ; under IFRS, issued share capital and reserves replace APIC terminology in many respects, and the treatment of treasury shares is governed by specific standards (IFRS Standards; IAS 32, IAS 1) (IFRS Foundation, 2023).

Part 2 — Transactions affecting retained earnings (P 18-10). The problem asks to indicate, for a set of transactions, whether retained earnings is increased, decreased, or unaffected. Some items may have two possible outcomes depending on whether APIC balances are sufficient to absorb some effects. The following table provides a concise determination with explanations:

  • 1. Sale of common stock — No effect on RE (issuance of stock affects contributed capital, not RE). N. (APIC increases; RE unaffected) (Kieso et al., 2019).
  • 2. Purchase of treasury stock at a cost less than original issue price — No effect on RE. N. (Treasury activity affects equity accounts; RE unchanged unless APIC is exhausted) (Kimmel et al., 2019).
  • 3. Purchase of treasury stock at a cost greater than original issue price — No effect on RE, potential reduction if APIC is insufficient. N or D (if APIC is insufficient, RE may be debited) (Kieso et al., 2019).
  • 4. Declaration of a property dividend — Decrease RE (noncash asset distribution reduces retained earnings) (IFRS/GAAP guidance) (IASB IFRS; FASB ASC 505).
  • 5. Sale of treasury stock for more than cost — No effect on RE (APIC increases; RE unaffected) (Kieso et al., 2019).
  • 6. Sale of treasury stock for less than cost — Potential effect on RE if APIC is exhausted; otherwise N. (Kieso et al., 2019).
  • 7. Net income for the year — Increase RE. I.
  • 8. Declaration of a cash dividend — Decrease RE (contributes to reduction in retained earnings at declaration) and liability recognition. D.
  • 9. Payment of a previously declared cash dividend — No further effect on RE beyond the declaration; N.
  • 10. Issuance of convertible bonds for cash — No effect on RE at issuance; N. (may affect equity structure and future RE upon conversion) (FASB ASC 505).
  • 11. Declaration and distribution of a 5% stock dividend — No immediate decrease in RE; RE is reclassified to contributed capital (N).
  • 12. Retirement of common stock at a cost less than the original issue price — No direct RE impact (N) unless APIC is insufficient to absorb the difference, in which case RE may be affected (N or D).
  • 13. Retirement of common stock at a cost greater than the original issue price — Potential decrease in RE if APIC is insufficient (D or N).
  • 14. A stock split effected in the form of a stock dividend — No effect on RE (N).
  • 15. A stock split in which the par value per share is reduced (not in the form of a stock dividend) — No effect on RE (N).
  • 16. A net loss for the year — Decrease RE (D).

Discussion and synthesis. The treatment above highlights that most equity transactions affect contributed capital (par value and APIC) rather than retained earnings directly. The only ordinary items that alter RE are net income, dividends, and periodic adjustments for unusual events that deplete APIC beyond recovery. If APIC balances are insufficient to absorb losses or retirement costs related to treasury stock, RE serves as the residual absorber. This is a standard approach in US GAAP, and IFRS alignment would similarly require careful reclassification of components within equity, with disclosures in the statement of changes in equity (Kieso et al., 2019; IFRS Foundation, 2023).

Conclusion. The McCollum Corporation exercises illustrate core concepts in equity accounting: issuing stock increases contributed capital, while treasury stock and its retirement affect both contributed capital and, when necessary, retained earnings. The retained earnings effects vary by transaction type and the availability of APIC reserves. Thorough journaling of each transaction ensures accurate reporting of stockholders’ equity and compliance with applicable standards (Kieso et al., 2019; Kimmel et al., 2019; IASB IFRS Foundation, 2023).

References

  • Kieso, D. E., Weygandt, J. J., & Warfield, D. (2019). Intermediate Accounting (17th ed.). Wiley.
  • Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2019). Financial Accounting: IFRS Edition (3rd ed.). Wiley.
  • Libby, R., Libby, P., & Hodge, F. (2019). Financial Accounting (9th ed.). McGraw-Hill Education.
  • IFRS Foundation. (2023). IFRS Standards. https://www.ifrs.org/issued-standards/
  • Deloitte. (2020). IFRS in Focus: Equity. https://www.iasplus.com/en/publications/ifrs-in-focus
  • PwC. (2021). IFRS Manual of Accounting. https://www.pwc.com/ifrs
  • FASB. (2023). Accounting Standards Codification (ASC) 505: Equity. https://asc.fasb.org/
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2011). Financial Accounting (6th ed.). Wiley.
  • Barth, M. E. (2017). Financial Statement Analysis and the Equity Market. Journal of Accounting Research, 55(2), 229-258.
  • Porter, J., & Smith, L. (2018). Equity Transactions under GAAP and IFRS: A Comparative Study. The Accounting Review, 93(4), 1011-1040.

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