You Will Create This Assignment Following The Assignment Det ✓ Solved

You Will Create This Assignment Following The Assignment Detail Instru

In the unit 2 assignment, we will record transactions that impact the equity section of the balance sheet. Corporations raise capital by selling stock in the corporation. The stockholders’ equity section contains a common stock account and an additional paid-in capital account. When stock is sold, the common stock account is credited for the par value of the stock sold and the additional paid-in capital is credited for the amount greater than par. Corporations can also issue a class of stock which typically carries unique features.

This stock is known as preferred stock. Finally, corporations can declare dividends during the accounting period. Dividends represent payouts of a corporation’s earnings. Dividends are declared by the corporation’s Board of Directors. Dividends can be in various forms including cash, property, liquidating, and stock dividends.

You will provide the journal entry to record issuing of common stock shares by a corporation, record issuing of cumulative preferred stock, and record a declaration of stock split. The unit 2 project has two parts. Part 1: Company A During 2018, Company A has the following transactions involving its common and preferred stock: Issued 20,000 shares of $8 par common stock for $26 a share; brings total shares outstanding to 50,000 shares Issued 6,000 shares of $100 par, 6%, cumulative preferred stock for $150 per share When market value of the common stock reached $15 a share, Company A declared a 3-for-1 stock split, reducing the par value to $188 per share The following is required: 1. Prepare a journal entry for each transaction. 2. Discuss the right of shareholders of capital stock for company A that they are entitled to. 3. Company A is formed as a corporation and therefore, its shareholders have limited liability. Limited liability means that stockholders can only lose the amount of their investment.

Discuss how this limited liability affects a corporation. Part 2: Company B Company B began 2018 with a $110,000 balance in retained earnings. The following events occurred during the year: Cash dividends of $18,500 were declared. 4,500 shares of callable preferred stock were recalled and retired for a price of $225 per share. The stock was originally issued for $150 per share. Net income was $550,000. A material error in net income for a previous period was corrected. The correction of the error decreased retained earnings by $18,500 after a related income tax. The following is required: 1. Prepare the statement of retained earnings for the year ended 2013, and any note disclosures separately. 2. Discuss the restriction of retained earnings that the board of directors can impose and why it would be necessary. Please add your file. Your assignment will be graded in accordance with the following criteria. Click here to view the grading rubric. Please submit your assignment. If you are planning to repurpose an assignment or submit one you have used before, please let your instructor know. If an instructor is not made aware of work being repurposed or reused, he or she will treat the assignment as a plagiarized task and reserves the right to post an F grade and submit a task for review to administration until proof of originality is provided. Click here for more information.

Sample Paper For Above instruction

Introduction

The assignment focuses on recording and analyzing transactions related to stock issuance, stock splits, and retained earnings management within corporations, specifically examining the cases of Company A and Company B. It explores essential accounting principles such as journal entries for stock transactions, shareholder rights, limited liability implications, and the preparation of financial statements including retained earnings statements.

Part 1: Company A

Journal Entries for Stock Transactions

In 2018, Company A engaged in several stock-related transactions. The first transaction involved issuing 20,000 shares of $8 par value common stock at $26 per share. The journal entry for this issuance would be:

Debit Cash: $520,000
Credit Common Stock: $160,000
Credit Additional Paid-In Capital: $360,000

This entry reflects the total cash received ($26 x 20,000 shares), with the par value credited to common stock and the excess credited to additional paid-in capital.

The second transaction involved issuing 6,000 shares of $100 par cumulative preferred stock at $150 per share. The journal entry is:

Debit Cash: $900,000
Credit Preferred Stock: $600,000
Credit Additional Paid-In Capital—Preferred: $300,000

Afterward, a 3-for-1 stock split was declared when the market value reached $15 per share. The company adjusted the par value to $3 per share (originally stated as $188 but assuming a typographical error for illustrative purposes). The stock split increases the number of shares outstanding and adjusts the stock's face value but does not impact total equity.

Since a stock split does not involve a journal entry to record cash or assets, the correct method is to disclose the split in notes to financial statements, noting the change in stock structure and par value.

Shareholders Rights

Shareholders of Company A are entitled to rights such as voting rights at shareholder meetings, dividends proportional to their ownership, and the right to share in residual assets upon liquidation. Preference may be given to preferred shareholders regarding dividends and assets, but they generally do not have voting rights unless specified.

Limited Liability and Its Impact

Limited liability ensures that shareholders' potential losses are restricted to their investment in the company. This immunity encourages investment by minimizing risk exposure. It promotes entrepreneurship and capital formation, fostering economic growth. However, it also means shareholders are not personally responsible for the company's debts, which might lead to moral hazard, where the company could undertake riskier projects. Overall, limited liability sustains the corporate structure's appeal by balancing risk and reward for investors.

Part 2: Company B

Statement of Retained Earnings for 2018

Beginning Retained Earnings: $110,000

Add: Net Income: $550,000

Less: Correction of prior period error (after tax): $18,500

Less: Dividends declared: $18,500

Recalled preferred stock redemption affects equity but not directly retained earnings. The retirement of preferred shares for $225 per share (total of 4,500 shares) reduces preferred stock account, which is disclosed in notes. The adjusted retained earnings statement is as follows:

Retained Earnings, Beginning: $110,000
Add: Net Income: $550,000
Less: Prior period correction: $18,500
Less: Dividends: $18,500
Retained Earnings, Ending: $613,500

Discussion of Retained Earnings Restrictions

The board of directors can impose restrictions on retained earnings through specific resolutions, limiting dividend payments to ensure sufficient capital for operational needs, debt repayments, or expansion plans. Such restrictions protect creditors and stakeholders by preventing the distribution of earnings that could jeopardize the company's financial stability. For example, legal requirements or covenants might restrict dividends if certain thresholds are not met.

Conclusion

This assignment elucidates fundamental accounting practices related to stock issuance, stock splits, and retained earnings management, emphasizing the importance of accurate journal entries, understanding shareholder rights, the significance of limited liability, and the necessity of strategic retained earnings restrictions for the financial health of corporations.

References

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• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Financial Accounting. Wiley.
• FASB. (2023). Financial Accounting Standards Board Standards & Updates. FASB.org.
• IRS. (2023). Corporate Tax Guide. IRS.gov.
• SEC. (2023). Securities and Exchange Commission Regulations. SEC.gov.
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