On January 1, 2013, Frascom Had The Following Account Balanc

On January 1 2013 Frascom Had The Following Account Balances In Its

On January 1, 2013, Frascom had the following account balances in its shareholder’s equity accounts: Common Stock, $1 par, 250,000 shares issued; Paid-in Capital – excess of par, common; Paid-in Capital – excess of par, preferred; Preferred Stock, $100 par, 10,000 shares outstanding; Retained Earnings; and Treasury Stock at cost, 5,000 shares. During 2013, Frascom, Inc. engaged in several transactions relating to its common stock, including property dividends, stock splits, stock dividends, and cash dividends. This paper analyzes these transactions, their accounting treatments, and their impact on the company's equity statements.

Paper For Above instruction

Frascom’s shareholder’s equity accounts at the beginning of 2013 provide a comprehensive snapshot of the company's capital structure. The accounts include common stock, paid-in capital, preferred stock, retained earnings, and treasury stock, each representing different components of equity that collectively indicate the financial health and leverage of the company. Throughout 2013, multiple transactions affected these equity accounts, requiring appropriate accounting treatments to reflect the economic reality of each transaction.

Initial Equity Structure

At the outset of 2013, Frascom's common stock had a par value of $1 per share, with 250,000 shares issued, resulting in $250,000 recorded in the common stock account. The company also had paid-in capital exceeding par value for both common and preferred stock, totaling $600,000 (comprising $500,000 for common stock and $100,000 for preferred). Preferred stock, with a par value of $100 per share and 10,000 shares outstanding, contributed $1,000,000 to preferred stock equity. Retained earnings stood at $2,000,000, reflecting accumulated net income not distributed as dividends. Treasury stock, representing repurchased shares, was recorded at cost, amounting to $25,000 for 5,000 shares.

Property Dividend Declaration and Distribution

On January 15, 2013, Frascom declared a property dividend of 100,000 shares of Slowdown Company, with a book value of $10 per share and market value of $9 per share. When a property dividend is declared, the company must recognize the fair value of the property distributed. Since the shares are property, the dividend reduces retained earnings by the total fair value of the property distributed, which is 100,000 shares × $9 = $900,000. Correspondingly, the property dividend payable is recorded, and the company must remove the shares from its investment holdings upon distribution.

On February 17, 2013, Frascom distributed the property dividends. The journal entry involves debiting the Dividend property account and crediting the Investment in Slowdown Company account, as well as reducing retained earnings by the fair value of the property distributed. This impacts the total equity, decreasing retained earnings and recognizing the dividend payout.

Stock Split and Stock Dividend

On April 10, 2013, a 2-for-1 stock split was declared and effected through a stock dividend at the market value of $4 per share. This split doubles the number of shares outstanding without changing the total dollar amount in common stock and paid-in capital. The par value per share remains at $1, but the number of shares doubles from 250,000 to 500,000, decreasing the stock's market value per share accordingly, facilitating liquidity and potential marketability.

Later, on July 18, 2013, Frascom declared and distributed a 3% stock dividend, based on the outstanding shares. The 3% stock dividend of 2013 increased the total shares outstanding by 3% X 500,000 shares = 15,000 shares. The market value of $5 per share on this date informs the reclassification of a portion of retained earnings to common stock and additional paid-in capital, reflecting the fair value of the stock dividend issued.

Cash Dividend Declaration and Payment

At the end of the year, on December 1, 2013, Frascom declared a cash dividend of $0.50 per share on the outstanding common stock. The number of shares eligible for dividends includes the original shares, stock split shares, and stock dividends – totaling 515,000 shares after adjustments. The dividend declared amounted to $257,500 ($0.50 × 515,000). The payment date, December 20, 2013, involved debiting dividends payable and crediting cash, reducing cash and retained earnings accordingly. These dividends decrease equity but do not affect the company's total assets beyond the cash disbursement and the reduction in retained earnings.

Accounting Implications and Summary

Each of these stock-related transactions impacts Frascom's financial statements and shareholder’s equity components differently. Property dividends are valued at fair market value, affecting retained earnings and recorded as a distribution of assets. Stock splits adjust the par value per share and the number of shares outstanding, with no impact on total equity or market value but potentially influencing liquidity. Stock dividends are a reclassification within equity, transferring amounts from retained earnings to paid-in capital—an economical way to reward shareholders without cash outflow. Cash dividends reduce retained earnings and cash, impacting overall financial position.

These transactions reflect prudent financial management strategies aimed at balancing shareholder value, company liquidity, and market perception. Accurate accounting for each change ensures transparent financial reporting and compliance with generally accepted accounting principles (GAAP). Overall, Frascom’s activities in 2013 illustrate key aspects of equity management, including dividend distributions, stock restructuring, and capital adjustments, which collectively shape the company's financial standing at year-end.

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