Chapter (13)

Corporations: Organization and Share Capital Transactions

Review Problems and Solutions
Problem (1): (Share Capital Transactions)
Dixon Corporation is authorized to issue 500,000 shares of $10 par value
ordinary shares, and 100,000 shares of 9%, $40 par value preference shares. During
2019, the company had the following share capital transactions.
Jan. 1 Issued 200,000 ordinary shares for cash at $15 per share.
Feb. 1 Issued 50,000 shares of preference shares for cash at $50 per share.
March 1 Attorneys for the company accepted 400 ordinary shares of as payment for
legal services rendered. The legal services are estimated to have a value of
$7,000.
June 10 Issued 8,000 ordinary shares of in exchange for land. The asking price of
the land was $150,000. Dixon Corporation's ordinary shares have been
actively traded on the stock exchange at $18 per share at the time of the
exchange.

Instructions: Journalize the above transactions for Dixon Corporation.

Problem (1) Solution:

Date Account Title and Explanation Dr. Cr.

2019
Jan. 1 Cash (200,000 shares × $15 issuance price) 300,000
Share Capital-Ordinary (200,000 shares ×
$10 par value) 2,000,000
Share Premium-Ordinary (200,000 shares ×
$5 amount above par value) 1,000,000
Feb. 1 Cash (50,000 shares × $50 issuance price) 2,500,000
Share Capital-Preference (50,000 shares ×
40 par value) 2,000,000
Share Premium-Preference (50,000 shares
× $10 amount above par value) 500,000
March 1 Organization Expense 7,000
Share Capital-Ordinary (400 shares × $10 4,000
par value)
Share Premium-Ordinary 3,000
June 1 Land (8,000 shares × $18 market price per share) 144,000
Share Capital-Ordinary (8,000 shares × $10 80,000
par value)
Share Premium-Ordinary 64,000

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Problem (2): (Treasury Stock Transactions)
Brent Corporation has a retained earnings balance at January 1, 2019 of $320,000.
The company uses the cost method to account for treasury stock transactions. During
2019, the following treasury stock transactions occurred:

February 10 Purchased 6,000 shares at a cost of $16 per share.

June 25 Sold 2,500 shares at $18 per share.
August 17 Sold 1,000 shares at $14.50 per share.
October 12 Sold 2,000 shares at $13 per share.

Instructions: Journalize the treasury share transactions for Brent Corporation.

Problem (2) Solution:

Date Account Title and Explanation Dr. Cr.

2019
Feb. 10 Treasury Shares (6,000 shares × $16 cost) 96,000
Cash 96,000
June 25 Cash (2,500 shares × 18 sale price per share) 45,000
Treasury (2,500 shares × $16 cost) 40,000
Share Premium-Treasury 5,000
Aug. 17 Cash (1,000 shares × $14.50 sale price) 14,500
Share Premium-Treasury (1,000 shares × $1.50 1,500
below cost)
Treasury Shares (1,000 shares × $16 cost 16,000
Oct. 12 Cash (2,000 shares × $13 sale price) 26,000
Share Premium-Treasury 3,500
Retained Earnings 2,500
Treasury Shares (2,000 shares × $16 cost) 32,000

Share Premium-Treasury
Dr. Cr.
Aug. 27 1,500 June 25 5,000
Oct. 12 3,500

Retained Earnings
Dr. Cr.
Oct. 12 2,500 Balance Jan 1 320,000

Notice That:
In October 12, treasury shares were sold below cost by $6,000 (2,000 shares ×
$3). The Share Premium-Treasury account has a credit balance after Aug. 27
transaction of $3,500. Therefore, in Oct 12 the Share Premium-Treasury
account is debited for $3,500, and the $2,500 remainder of the $6,000 is
debited to the Retained earnings account.

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Problem (3): (Equity Section)
The following accounts appear in the ledger of Aston Corporation after the
books are closed at December 31, 2019.

Share Capital-Ordinary, $1 par value, 500,000 shares authorized, 400,000 shares

issued …………………………………………………………………………$400,000
Share Premium—Ordinary……………………………… ………………….....650,000
Share Capital- Preference, 8%, $100 par value, 10,000 shares authorized;
2,000 shares…………………………………………………………………… 200,000
Retained Earnings …………………………………………………………… 950,000
Treasury Shares (10,000 shares) ………………………………………………..85,000
Share Premium— Preference…………………………… …………………….310,000

Instructions: Prepare the stockholders' equity section at December 31, 2019.

Problem (3) Solution:

Ashton Corporation
Statement of Financial position (Partial)
December 31, 2019
Equity:
Share Capital, Preference 8%, $100 par value, 10,000 shares authorized,
2,000 shares issued and outstanding $200,000
Share Capital, Ordinary, $1 par value, 500,000 shares authorized
400,000 shares issued, 390,000 shares outstanding 400,000
Share Premium, Preference 310,000
Share Premium, Ordinary 650,000
Retained Earnings 950,000
Less: Treasury shares (10,000 shares) (85,000)
Total Equity $2,425,000

Notice That:
 The dollar amount of share capital = number of shares issued × par value
 Number of outstanding shares = number of shares issued – number of treasury
shares (400,000 ordinary shares issued – 10,000 treasury shares = 390,000
shares outstanding).

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Problem (4): (Share Capital Transactions)
Fred Corporation is authorized to issue 800,000 ordinary shares of $5 par
value, and 100,000, 8%, $60 par value preference shares. On January 1, 2019, the
second year of operations, the retained earnings balance was $75,000. During 2019,
the company had the following share capital transactions.
Jan. 7 Issued 100,000 ordinary shares of for cash at $14 per share.
May. 5 Attorneys for the company accepted 200 ordinary shares as payment for
legal services rendered. The legal services are estimated to have a value of
$3,200.
June 1 Issued 10,000 preference share for cash at $100 per share.
July 4 Issued 10,000 ordinary shares of in exchange for a building. The building
was advertised for $200,000. Fred Corporation's ordinary shares have been
actively traded on the stock exchange at $19 per share at the time of the
exchange.
Sept. 1 Purchased 7,000 ordinary shares for the treasury at a cost of $20 per share.
Oct. 2 Sold 2,000 treasury shares at $21 per share.
Dec. 20 Sold 3,000 treasury shares at $18 per share.

Required: Journalize the 2019 share capital transactions for Fred Corporation.

Problem (4) Solution:

Date Account Title and Explanation Dr. Cr.

2019
Jan. 7 Cash (100,000 shares × $14 issuance price) 1,400,000
Share Capital-Ordinary (100,000 shares ×
$5 par value) 500,000
Share Premium-Ordinary (100,000 shares ×
$9 amount above par value) 900,000
May 5 Organization Expense 3,200
Share Capital-Ordinary (200 shares × $5
par value) 1,000
Share Premium-Ordinary 2,200
June 1 Cash (10,000 shares × $100 issuance price) 1,000,000
Share Capital-Preference (100,000 shares ×
60 par value) 600,000
Share Premium-Preference (100,000 shares
× $40 amount above par value) 400,000
July 4 Building (10,000 shares × $19 market price per 190,000
share)
Share Capital-Ordinary (10,000 shares × $5 50,000
par value)
Share Premium-Ordinary 140,000
Sept. 1 Treasury Shares (7,000 shares × $20 cost) 140,000
Cash 140,000

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 Date Account Title and Explanation Dr. Cr.
Oct. 2 Cash (2,000 shares × 21 sale price per share) 42,000
Treasury (2,000 shares × $20 cost) 40,000
Share Premium-Treasury 2,000
Dec. 20 Cash (3,000 shares × $18 sale price) 54,000
Share Premium-Treasury 2,000
Retained Earnings 4,000
Treasury Shares (3,000 shares × $20 cost) 60,000

Share Premium-Treasury
Dr. Cr.
Dec. 20 2,000 Oct 2 2,000

Retained Earnings
Dr. Cr.
Dec. 20 4,000 Balance Jan 1 75,000

Notice That:
In Dec 20, treasury shares were sold below cost by $6,000 (3,000 shares ×
$2). The Share Premium-Treasury account has a credit balance after Oct. 2
transaction of $2,000. Therefore, in Dec 20 the Share Premium-Treasury
account is debited for $2,000, and the $4,000 remainder of the $6,000 is
debited to the Retained earnings account.

Dr. Zakaa Khalifa