Accounting Issues Related to Company

Company: A company is a voluntary association of persons, recognized by law,

having a distinct name, common seal, formed to carry out a business for profit with
capital divisible into transferable shares, limited liability, a corporate body, and
continuous succession.
In the eyes of the law, the corporation is an artificial being, invisible, and intangible. It
has the legal rights of an individual: it can own property, purchase goods and services,
and sue other persons or corporations. The actual owners of the business are the
shareholders, those who have invested their money.

Characteristics of a Corporation
1. Separate legal existence
2. Transferable ownership rights
3. Ability to acquire capital
4. Continuous life
5. Corporation management
6. Government regulation
7. Additional taxes

Classification of Corporation Stock Capital: The stock capital of a company has

different names at different stages:
Authorized Capital: The amount of stock that a corporation is authorized to sell as
indicated in its charter on the basis of which the company is registered is called
authorized capital. It is the limit up to which the company can raise capital.
Paid-up Capital: This represents the amount of cash or other assets paid in to the
corporation by stockholders in exchange for shares.

Issue of Corporation Stock: A corporation can issue common stock directly to

investors. Or it can issue the stock indirectly through an investment-banking firm
(brokerage house) that specializes in bringing securities to the attention of prospective
investors.

Sale of Corporation Share/Stock

Corporations' stock can be sold in following three ways:
a) Sale of stock at par value
b) Sale of stock at a premium
c) Sale of stock at a discount

1
PROBLEM-1: Hydro-Slide Corporation is authorized to issue 1,00,000 shares of TK 10 par
value common stock. In its first year the company had the following transactions:
Jan. -01: Issued 20,000 shares of TK 10 par value common stock at par for cash.
Jan. -15: Issued 5,000 shares of common stock to attorneys in settlement of their
bill of TK 50,000.
Feb. -01: Issued 15,000 shares of TK 10 par value common stock for cash at TK
15 per share.
June-01: Issued 10,000 shares of stock for land. The land had an asking price
of TK 2,00,000. The stock is currently selling on national exchange
at TK 18 per share.
Instructions:
a. Journalize the transactions.
b. Prepare the stockholders equity section assuming the company had retained earnings
of TK 2,00,000.
Solution: (a)
Date Explanation Debit Credit
(b) Cash/Bank 2,00,000
Jan. 01 Common stock 2,00,000
(To record issuance of 20,000 shares at TK 10
per share)
Preliminary expense 50,000
Jan. 15 Common stock 50,000
(To record issuance of 5,000 shares for
attorneys' fees)
Cash/Bank 2,25,000
Feb. 01 Common stock 1,50,000
Share Premium (Paid in Capital in excess of par) 75,000
(To record issuance of 15,000 shares at TK 15
per share)
Land 1,80,000
June 01 Common stock 1,00,000
Share Premium 80,000
(To record issuance of 10,000 shares of TK 10
par value stock for land)
HYDRO-SLIDE CORPORATION
Balance Sheet (Partial)
Stockholders' Equity:
Paid in capital:
Common stock, TK 10 par value,
1,00,000 shares authorized, 50,000
shares issued and outstanding------------- 5,00,000
Additional paid -in capital:
Share premium------------------------------------ 1,55,000
Total paid in capital 6,55,000
Retained earnings------------------------------------ 2,00,000
Total stockholders' equity---------------------- 8,55,000

2
PROBLEM-2: Morning Sun Ltd. started with an Authorized Capital of TK 5,00,00,000
divided into 50,00,000 equity shares of TK 10 each.
On January 1, 2019 the company's stockholders' equity section showed the following balances:
Common stock (30,00,000 shares) 3,00,00,000
Share premium 50,00,000
Retained earnings 90,00,000
During January, it offered 5,00,000 shares at a premium of TK 4 per share for public subscription (100
shares in a lot). The company received 40,000 applications for 40,00,000 shares. After lottery the
company allotted 5,00,000 shares and the remaining application money of 35,00,000 shares were
returned to the applicants. Net income for the year was TK 30,00,000.
Required:
a. Prepare journal entries for the above transactions.
b. Enter the beginning balances in the stockholders' equity accounts and post the journal
entries to the stockholders' equity accounts.
c. Prepare a stockholders' equity section at January 31, 2019.

Solution: R-a) MORNING SUN LTD.

Journal entries
Date Explanation Dr. Cr.
Jan. Cash/bank 5,60,00,000
Share application 5,60,00,000
(To record receipts of application money of
40,00,000 shares)
Share application 5,60,00,000
Common stock 50,00,000
Share Premium 20,00,000
Cash/ bank 4,90,00,000
(To record issuance of 5,00,000 shares at TK 14 per
share and return of application money)
Income summary 30,00,000
Retained earnings 30,00,000
(To transfer net income to retained earnings
account)

R- (b) Common Stock

Date Explanation Ref. Amount Date Explanation Ref. Amount
Jan.1 Balance b/f 3,00,00,000
Share application 50,00,000
3,50,00,000

Share Premium
Date Explanation Ref. Amount Date Explanation Ref. Amount
Jan.1 Balance b/f 50,00,000
Share application 20,00,000
70,00,000

3
 Retained Earnings Accounts
Date Exp. Ref. Amount Date Explanation Ref. Amount
Jan.01 Balance b/f 90,00,000
Jan.31 Income summary 30,00,000
1,20,00,000

(c) MORNING SUN LTD.

Balance Sheet (Partial)
Stockholders' equity:
Paid in capital
Common stock, TK 10 par value,
50,00,000 shares authorized, 35,00,000
shares issued and outstanding--------------- 3,50,00,000
Additional paid -in capital:
Share Premium-------------------------------------- 70,00,000
Total paid in capital --------------------------- 4,20,00,000
Retained earnings-------------------------------------- 1,20,00,000
Total stockholders' equity 5,40,00,000
PROBLEM-3: Himadri Company was organized on January 1, 2019. It is authorized to issue
20,000 shares of 6%, TK50 par value preferred stock, and 5,00,000 shares of common stock with a
par value of TK10 each. The following stock transactions were completed during the first year:
Jan. 10: Issued 1,00,000 shares of common stock for cash at TK11
Mar. 01: Issued 10,000 shares of preferred stock for cash at TK55 per share.
Apr. 01: Issued 25,000 shares of common stock for land. The asking price of the land was
2,90,000. The company’s estimate of fair market value of the land was 2,85,000.
May 15: Issued 75,000 shares of common stock for cash at TK12 per share.
Aug. 01: Issued 10,000 shares of common stock to attorneys in payment of their bill for
TK1,30,000.
Sept. 01: Issued 5,000 shares of common stock for cash at TK14 per share.
Nov. 01: Issued 2,000 shares of preferred stock for cash at TK58 per share.
Instructions:
a. Journalize the transactions.
b. Post to the stockholder’ equity accounts.(Use J1 as the posting reference)
c. Prepare the paid-in capital section of stockholders’ equity at December 31, 2019.

R- (a) HIMADRI COMPANY

Date Explanation Ref. Dr. Cr.
Cash/Bank 11,00,000
Jan. 10 Common stock 10,00,000
Share Premium(Common) 1,00,000
(To record issuance of 1,00,000 shares at TK 11 per
share)
March 1 Cash/Bank 5,50,000
6% Preferred stock 5,00,000
Share Premium(Preferred) 50,000
(To record issuance of 10,000 shares of preferred
stock at TK 55 per share)

4
 April 1 Land 2,85,000
Common stock 2,50,000
Share Premium(Common) 35,000
(To record issuance of 25,000 shares of
common stock for land)
May15 Cash/Bank 9,00000
Common stock 7,50,000
Share Premium(Common) 1,50,000
(To record issuance of 75,000 shares at TK 12 per
share)
August 1 Preliminary expense 1,30,000
Common stock 1,00,000
Share Premium(Common) 30,000
(To record issuance of 10,000 shares of common
stock for attorneys' fees at TK 13 per share)
Sept. 1 Cash/Bank 70,000
Common stock 50,000
Share Premium(Common) 20,000
(To record issuance of 5,000 shares at TK 14 per
share)
Nov. 1 Cash 1,16,000
6% Preferred stock 1,00,000
Share Premium (Preferred) 16,000
(To record issuance of 2,000 shares of preferred
stock at TK 58 per share)

R-b)
Common stock
Date Explanation Ref. Amount Date Explanation Ref. Amount
Jan.10 Cash 10,00,000
Apr. 1 Land 2,50,000
May 15 Cash 7,50,000
Aug.1 Preliminary exp. 1,00,000
Sep.1 Cash 50,000
21,50,000

Share Premium (Common)

Date Explanation Ref. Amount Date Explanation Ref. Amount
Jan.1 Cash 1,00,000
Apr. 1 Land 35,000
May 15 Cash 1,50,000
Aug.1 Org. expenses 30,000
Sep.1 Cash 20,000
3,35,000

6% Preferred Stock
Date Explanation Ref. Amount Date Explanation Ref. Amount
Mar.1 Cash 5,00,000
Nov.1 Cash 1,00,000
6,00,000
5
 Share Premium (Preferred)
Date Explanation Ref. Amount Date Explanation Ref. Amount
Mar.1 Cash 50,000
Nov.1 Cash 16,000
66,000

R- c:
Stockholders' equity:
Paid in capital
Capital stock
6% Preferred stock, TK 50 par value, 20,000
shares authorized, 12,000 shares issued
and outstanding 6,00,000
Common stock, TK 10 Par value,
5,00,000 shares authorized, 2,15,000 shares
issued and outstanding 21,50,000
27,50,000
Additional paid -in capital:
Share Premium (Common) 66,000
Share Premium (Preferred) 3,35,000
Total paid in capital 4,01,000
Retained earnings --
Total stockholders' equity 31,51,000

HOME WORK
1. Differentiate Common stock from Preference stock.
2. Buddy Company was organized on January 01, 2019 in Rajshahi. Its charter
authorized the company to issue 1,00,00,000 shares of TK 10 par value common
stock and an additional 10,000 shares of 4%, TK1,000 par value preferred stock.
Here are the transactions related to the company's stock during 2019:
Jan. 01: Issued 10,00,000 shares of common stock for 1,25,00,000.
Feb. 01: Issued 50,000 shares of common stock for accounting and legal services.
The services were billed to the company TK 8,00,000.
Mar. 15: Issued 12,00,000 shares of common stock to Dewan Morshed in
exchange of building and land that had apprised values of 90,00,000 and
42,00,000 respectively.
June 20: Issued 5,000 shares of preferred stock for TK 60,00,000.
Instructions:
a. Journalize the transactions.
b. Prepare the stockholders equity section assuming the company had retained
earnings of TK 25,00,000.

6
 Final Account
Problem-1(Proprietorship): The following is the adjusted trial balance of Moulton
Department Store for the year ended on June 30, 2019:

Accounts title Debit Credit

Accounts payable 47,000
Accounts receivable 11,000
Accumulated depreciation - Delivery equipment 18,000
Accumulated depreciation - Store Equipment 41, 000
Cash 8,000
M. Moulton, Capital 84, 000
Cost of goods sold 6,33,000
Delivery expense 8,000
Delivery equipment 57,000
Depreciation expense- Delivery equipment 3,000
Depreciation expense - Store equipment 9,000
M. Moulton, Drawing 12,000
Insurance expense 10,000
Interest revenue 5,000
Merchandise inventory 36,000
Notes payable 46,000
Prepaid insurance 3,000
Property tax expense 3,000
Property tax payable 3,000
Rent expense 19,000
Salaries expense 1,20,000
Sales 8,50,000
Sales commissions expense 10,000
Sales commission payable 2,000
Sales returns and allowances 10,000
Store equipment 1,25,000
Utilities expense 10,000
Interest expenses 9,000
Total- 10,96,000 10,96,000
Additional data:
Notes payable are due in 2021.

Instruction:
i. Prepare a multiple-step income statement for the year ended on June 30, 2019.
ii. Prepare an owner's equity statement for the year ended on June 30, 2019. And
iii. Prepare a classified balance sheet on June 30, 2019.

MOULTON DEPARTMENT STORE

Income statement
7
 For the year ended June 30, 2019
Sales revenue 8,50,000
Less sales return and allowances 10,000
Net sales 8,40,000
Less: Cost of goods sold 6,33,000
Gross profit 2,07,000
Operating expenses:
Salaries expenses 1,20,000
Delivery expense 8,000
Depreciation expense-Delivery equip 3,000
Depreciation expense- Store Equip. 9,000
Insurance expense 10,000
Sales commission expense 10,000
Property tax expense 3,000
Rent expenses 19,000
Utilities expenses 10,000
Total operating expenses 1,92,000
Income from operations 15,000
Add: Other revenue and gains:
Interest revenue 5,000
20,000
Less: Other expenses and losses:
Interest expenses 9,000
Net income 11,000

MOULTON DEPARTMENT STORE

Owners Equity Statement
June 30, 2019
M. Moulton, Capital, July 1 84,000
Add: Net income 11,000
95,000
Less: Drawing 12,000
M. Moulton, Capital, June 30 83,000

MOULTON DEPARTMENT STORE

Balance Sheet
June 30, 2019

Assets
Current assets:
8
 Cash 8,000
Accounts receivable 11,000
Merchandise inventory 36,000
Prepaid insurance 3,000
Total current assets 58,000
- -
Long-term investment:
Property, plant and equipment:
Delivery equipment 57,000
Less: Accumulated dep. 18,000 39,000
Store equipment 1,25,000
Less: Accumulated dep. 41,000 84,000
Total Property, plant and equipment 1,23,000
Intangibles: - -
Total assets 1,81,000

Liabilities and owner’s equity:

Liabilities:

Current liabilities
Accounts payable 47,000
Property tax payable 3,000
Sales commission payable 2,000
Total current liabilities 52,000
Long-term liabilities:
Long-term notes payable 46,000
Total liabilities 98,000
Owner's Equity:
M. Moulton, Capital 83,000
Total liabilities and owner’s equity 1,81,000

PROBLEM-2:
Square Company's adjusted trial balance at December 31, 2019 is presented below:
Accounts' title Debit Credit
Cash 28,000
Accounts receivable 36,800
Notes receivable 10,000
Interest receivable 3,000
Merchandise inventory 36,200
Prepaid insurance 3,600
Building 1,50,000
9
 Equipment 60,000
Patent 29,000
Allowance for doubtful accounts 5,500
Accumulated dep.- Building 50,000
Accumulated dep.- Equipment 24,000
Accounts payable 27,300
Salaries payable 7,000
Unearned rent 6,000
Notes payable (short-term) 11,000
Interest payable 2,000
Notes payable (long-term) 35,000
Common stock 50,000
Retained earnings(beginning) 63,600
Dividends 12,000
Sales 9,00,000
Interest revenue 2,500
Rent revenue 3,500
Bad debt expense 5,000
Cost of goods sold 6,30,000
Depreciation expense- Buildings 4,000
Depreciation expense- Equipment 5,000
Insurance expense 1,000
Interest expense 2,000
Other operating expenses 61,800
Salaries expense 1,10,000
Total - 11,87,400 11,87,400

Instructions:
i. Prepare the income statement in single-step form and multi-step form.
ii. Prepare a retained earnings statement as on December 31, 2019.
iii. Prepare a classified balance sheet as on December 31, 2019.

R- i:
SQUARE COMPANY
Income statement (single-step)
For the year ended on December 31, 2019
Revenues:
Sales 9,00,000
Interest revenue 2,500
Rent revenue 3,500
Total revenue 9,06,000
Expenses:
Cost of goods sold 6,30,000
Salaries expenses 1,10,000
Bad debt expense 5,000

10
 Depreciation expense-Buildings 4,000
Depreciation expense- Equipment 5,000
Insurance expense 1,000
Interest expenses 2,000
Other operating expense 61,800
Total expense 8,18,800
Net income- 87,200

SQUARE COMPANY
Income statement (multiple-step)
For the year ended on December 31, 2019
Sales 9,00,000
Cost of goods sold 6,30,000
Gross profit 2,70,000
Operating expenses:
Salaries expenses 1,10,000
Bad debt expense 5,000
Depreciation expense-Buildings 4,000
Depreciation expense- Equipment 5,000
Insurance expense 1,000
Other operating expense 61,800
Total operating expenses 1,86,800
Income from operations 83,200
Add: Other revenue and gains:
Interest revenue 2,500
Rent revenue 3,500
6,000
89,200
Less: Other expenses and losses:
Interest expenses 2,000
Net income 87,200

SQUARE COMPANY
Retained earnings statement
December 31, 2019
Retained earnings, January 1 63,600
Add: Net income 87,200
1,50,800
Less: Dividend 12,000
Retained earnings, December 31 1,38,800
Square Company
Balance Sheet
December 31, 2019
Assets
Current assets:
Cash - - - - - - - 28,000
Accounts receivable 36,800

11
 Less: Allowance for doubt. Acc. 5,500 31,300
Notes receivable 10,000
Interest receivable 3,000
Merchandise inventory 36,200
Prepaid insurance 3,600
Total current assets 1,12,100
Long-term investment:
Property, plant and equipment:
Building 1,50,000
Less: Accumulated dep. 50,000 1,00,000
Equipment 60,000
Less: Accumulated dep. 24,000 36,000
Total Property, plant and equipment 1,36,000
Intangibles:
Patent 29,000
Total assets 2,77,100
Liabilities and Stockholders' Equity:
Liabilities:
Current liabilities
Accounts payable 27,300
Salaries payable 7,000
Unearned rent 6,000
Notes payable 11,000
Interest payable 2,000
Total current liabilities 53,300
Long-term liabilities:
Long-term notes payable 35,000
Total liabilities 88,300
Stockholders' Equity:
Common Stock 50,000
Retained Earnings 1,38,800 1,88,800
Total liabilities and stockholders' equity 2,77,100
PROBLEM-3: Kissel Hardware Corporation had 20,000 shares of common stock outstanding
throughout the year. The year end adjusted trial balance (except adjustment of ending inventory
TK 172,000) at December 31, 2019 is as follows:
Accounts name Debit Credit
Sales 980,000
Sales return and allowances 53,000
Purchases 449,000
Purchase return and allowance 23,000
Freight-in 14,000
Sales salaries expenses 124,000
Rent expense, selling space 12,000
Advertising expense 33,000
Depreciation expense- Delivery equipment 9,000
Office salaries expense 58,000
Office supplies expenses 19,000
Rent expense, office space 4,000
Utilities expense, office space 14,000
Insurance expense, office 16,000
Administrative salaries expense 84,000
12
 Interest expense 12,000
Interest income 3,000
Income taxes 14,000
Cash 31,000
Short-term investment 33,000
Notes receivable 35,000
Accounts receivable 76,000
Merchandise inventory (01-01-2019) 145,000
Prepaid insurance 5,000
Office supplies 4,000
Building 150,000
Land 130,000
Delivery equipment 140,000
Accumulated depreciation- Delivery equip. 35,000
Accounts payable 64,000
Salaries payable 6,000
Long-term notes payable 50,000
Common stock, TK 10 par value 200,000
Share premium 60,000
Retained earnings 243,000
Total- 1664,000 1664,000

From the information provided above, prepare the following:

i. An income statement in single-step form
ii. An income statement in multi-step form showing the sub-grouping of operating
expenses.
iii. A classified balance sheet.

R- i:
KISSEL HARDWARE
Income statement (single-step form)
For the year ended December 31, 2019
Revenues:
Net sales (note-1) 9,27,000
Interest revenue 3,000
Total revenue 9,30,000
Expenses:
Cost of goods sold (note-2) 413,000
Sales salaries expenses 124,000
Rent expenses, selling space 12,000
Advertising expenses 33,000
Depreciation expenses, del. Equip. 9,000
Office salaries expenses 58,000
Office supplies expense 19,000
Rent expenses, office space 4,000
Utilities expenses, office 14,000
13
 Insurance expense, office 16,000
Administrative salaries exp. 84,000
Interest expenses 12,000
Income tax 14,000
Total expenses 8,12,000
Net income 1,18,000

Note-1: Net sales revenue:

Sales revenue 9,80,000
Less sales return and allowances 53,000
Net sales revenue 9,27,000

Note-2: Cost of goods sold:

Opening inventory of finished goods 145,000
Add: Purchase during the year 449,000
594,000
Less: Purchase return and allowances 23,000
5,71,000
Add: Freight in 14,000
Cost of goods available for sale 5,85,000
Less: Ending inventory of finished goods 1,72,000
4,13,000

R-ii)
KISSEL HARDWARE
Income statement (multi- step form)
For the year ended December 31, 2019
Sales revenue 9,80,000
Less sales return and allowances 53,000
Net sales 9,27,000
Cost of goods sold 4,13,000
Gross profit 5,14,000
Operating expenses:
Selling expenses:
Sales salaries expenses 124,000
Rent expenses, selling space 12,000
Advertising expenses 33,000
Depreciation expenses, del. Equip. 9,000
Total selling expenses 178,000
Administrative expenses:
Office salaries expenses 58,000
Office supplies expenses 19,000
Rent expenses, office space 4,000
Utilities expenses, office 14,000
14
 Insurance expenses, office 16,000
General management salary exp. 84,000
Total administrative expenses 195,000
Total operating expenses 3,73,000
Income from operations 1,41,000
Other revenue and gains:
Interest revenue 3,000
Income before interest and taxes 1,44,000
Interest expenses 12,000
Income before tax 132,000
Income tax 14,000
Net income tto

KISSEL HARDWARE
Balance Sheet
December 31, 2019
Assets
Current assets:
Cash 31,000
Short-term investment 33,000
Notes receivable 35,000
Accounts receivable 76,000
Merchandise inventory 172,000
Prepaid insurance 5,000
Office supplies 4,000
Total current assets 356,000

Long-term investment:
Property, plant and equipment:
Building 150,000
Land 130,000
Delivery equipment 140,500
Less: Accumulated dep. 35,500
105,000
Total Property, plant and equipment 385,000
Intangibles:
Total assets 741,000
Liabilities and owners' equity:
Liabilities:

Current liabilities:
Accounts payable 64,000
15
 Salaries payable 6,000
Total current liabilities 70,000
Long-term liabilities:
Long-term notes payable 50,000
Total liabilities 120,000
Stockholders' equity:
Common stock, TK 10 par value 20,000 shares
authorized, issued and outstanding 200,000
Share premium 60,000
Total contributed capital 260,000
Retained earnings(243,000+118,000) 361,000
Total stockholders' equity 621,000
Total liabilities and stockholders' equity 741,000

PROBLEM-4: Lew Corporation, a seller of outdoor sports equipment, is authorized to issue

50,000 share of TK10 each. At the end of the year on June 30, 2019, the following financial
information was available in the company’s trial balance:
Accounts name Debit Credit
Sales 1428,000
Cost of goods sold 700,000
Administrative expenses 160,000
Selling expenses 440,000
Interest expense 45,000
Interest revenue 5,000
Income taxes 14,000
Accounts payable 65,000
Accounts receivable 209,000
Accumulated depreciation-Equipment 34,000
Accumulated depreciation- furniture 84,000
Cash 56,000
Common stock, TK 10 par, 20,000 shares issued
and outstanding 200,000
Equipment 177,000
Furniture 263,000
Inventory 273,000
Investment in long-term securities 112,000
Investment in short-term Govt. securities 79,000
Long-term notes payable 200,000
Share premium 180,000
Retained earnings 263,000
Notes payable- short-term 100,000
Prepaid expenses 11,000
Dividend 20,000
25,59,000 25,59,000
Required: From the information above, prepare an income statement in single-step form, a statement of
retained earnings, and a classified balance sheet.

Lew Corporation
Income statement (single-step)
For the year ended June 30, 2019

16
 Revenues:
Net sales 14,28,000
Interest revenue 5,000
Total revenue 14,33,000
Expenses:
700,000
Cost of goods sold
Administrative expenses 160,000
Selling expenses 440,000
Interest expenses 45,000
Income tax 14,000
Total expenses 13,59,000
Net income 74,000

Lew Corporation
Statement of Retained Earnings
For the year ended on June 30, 2019
2,63,000
Retained earnings, beginning
Add: Net income 74,000
3,37,000
Less: Dividend 20,000
Retained earnings, ending 3.17,000

Lew Corporation
Balance Sheet
June 30, 2019
Assets
Current assets:
Cash 56,000
Short-term investment 79,000
Accounts receivable 2,09,000
Inventory 2,73,000
Prepaid expense 11,000
Total current assets 6,28,000
Long-term investment:
Investment in Long-term Securities 1,12,000
Property, plant and equipment:
Equipment 1,77,000
Less: Accumulated Depreciation 34,000 1,43,000
Furniture 2,63,000
Less: Accumulated depreciation 84,000 1,79,000
Total Property, plant and equipment 3,22,000
Total assets 10,62,000

Liabilities and Stockholders’ equity:

Liabilities:

17
 Current liabilities:
Accounts payable 65,000
Notes payable 1,00,000
Total current liabilities 1,65,000
Long-term liabilities:
Long-term notes payable 2,00,000
Total liabilities 3,65,000
Stockholders' equity:
Common stock: TK 10 par value 50,000 shares
authorized; 20,000 shares issued and outstanding 2,00,000
Share premium 1,80,000
Total contributed capital 2,60,000
Retained earnings 3,17,000
Total stockholders' equity 6,97,000
Total liabilities and stockholders' equity 10,62,000

Problem-5: West Limited with an Authorized Capital of TK 10,00,000 divided into1,00,000

shares of TK 10 each has the following adjusted trial balance on December 31, 2019:
WEST LIMITED
Adjusted Trial Balance
Account title Debit Credit
Common stock (TK10 par) 5,00,000
Notes payable (60% long-term) 40,000
Cost of goods sold 14,50,000
Sales 18,94,000
Sales return and allowances 15,000
Sales discounts 5,000
Accounts receivable 1,74,000
Allowance for doubtful accounts 15,000
Accounts payable 1,08,000
Salary expenses 1,09,000
Store supplies expenses 25,000
Utilities expenses 40,000
Prepaid insurance 2,000
Merchandise inventory (31-12-2019) 1,50,000
Cash on hand & at bank 23,000
Land property 2,40,000
Office furniture (cost) 74,000
Buildings (cost) 2,70,000
Accumulated dep. -Furniture 12,000
Accumulated dep. - Building 17,000
Patent 60,000
Retained earnings - 1,50,000
Office rent expenses 12,000
Repair expenses 3,000
Interest expense 7,000
Income taxes expenses 12,000
Carriage outward 7,000
Sales commission 20,000
Advertisement expenses 16,000
Bad debt expenses 4,000
18
 Insurance expense 10,000
Depreciation expenses- Furniture 5,000
Depreciation expenses- Building 7,000
Salary payable 9,000
Prepaid rent 5,000
27,45,000 27,45,000
Instructions:
i. Prepare an income statement in multi-step form showing the sub-grouping of operating
expenses. Assume that utilities expenses are 50% selling and 50% administrative, and
salaries expense of TK 40,000 is sales related.
ii. Prepare a retained earnings statement as on December 31, 2019.
iii. Prepare a classified balance sheet as on December 31, 2019.

WEST LIMITED
Income statement
For the year ended December 31, 2019
Sales revenue 18,94,000
Less sales return and allowances 15,000
Sales discount 5,000
20,000
Net sales 18,74,000
Cost of goods sold 14,50,000
Gross profit 4,24,000
Operating expenses:
Selling expenses:
Salary expenses 40,000
Store supplies expenses 25,000
Utility expense 20,000
Carriage outwards 7,000
Sales commission 20,000
Advertising expenses 16,000
Bad debt expenses 4,000
Total selling expenses 1,32,000
Administrative expenses:
Office salary expense 69,000
Utility expense 20,000
Office rent expenses 12,000
Repair expenses 3,000
Insurance expenses 10,000
Depreciation expenses, furniture 5,000
Depreciation expenses, building 7,000
Total administrative expenses 1,26,000
Total operating expenses 2,58,000
Income from operations 1,66,000
Other revenue and gains: -

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 Income before interest and taxes 1,66,000
Interest expenses 7,000
Income before tax 1,59,000
Income tax 12,000
Net income 1,47,000

WEST LIMITED
Retained Earnings statement
For the year ended December 31, 2019
Balance January 1 1,50,000
Add: Net income 1,47,000
Balance December 31 2,97,000

WEST LIMITED
Balance Sheet
December 31, 2019
Assets: Amount Amount
Current assets:
Cash on hand & at bank 23,000
Accounts receivable 1,74,000
Less: Allowance for doubt. Accounts 15,000
1,59,000
Merchandise inventory 1,50,000
Prepaid insurance 2,000
Prepaid rent 5,000
Total current assets - 3,39,000
Long-term investment: -
Property, plant and equipment(Fixed Assets):
Land property 2,40,000
Furniture 74,000
Less: Accumulated depreciation- Furniture 12,000
62,000
Building 2,70,000
Less: Accumulated depreciation- Building 17,000
2,53,000
Total Property, plant and equipment - 5,55,000
Intangible Assets:
Patent 60,000
Total assets - 9,54,000
Liabilities and Stockholders' Equity:
Liabilities:
Current liabilities:
Short term notes payable 16,000
Accounts payable 1,08,000
Salaries payable 9,000
Total current liabilities - 1,33,000
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 Long-term liabilities:
Long-term notes payable 24,000
Total liabilities - 1,57,000
Stockholders' Equity:
Common Stock 5,00,000
Retained Earnings 2,97,000
Total Stockholders' Equity - 7,97,000
Total Liabilities & Stockholders' Equity 9,54,000

Dividends and Retained Earnings

Dividend is a distribution by a corporation to its stockholders on a pro rata (proportional) basis.
In other words, dividend is a taxable payment declared by a company's board of directors and
given to its shareholders out of the company's current or retained earnings. A dividend is
allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion
to their shareholding.

Dividends are usually given in cash (cash dividend) or by stock (stock dividend). In addition to
cash dividend and stock dividend there are two, but not common, forms of dividends which are:
property dividend and scrip dividend. Companies are not required to pay dividends. But
dividends provide an incentive to own stock in stable companies even if they are not
experiencing much growth. The companies that offer cash dividends are most often companies
that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting
their profits, so they usually choose to pay them out to their shareholders, also called payout.
Dividends may be expressed in two ways:
1. as a percentage of the par or stated value of the stock, or
2. as a dollar or Taka amount per share.

Which is better a cash dividend or a stock dividend?

The purpose of dividends is to return wealth back to the shareholders of a company. There are
two main types of dividends: cash and stock.
A cash dividend is a payment made by a company out of its earnings to investors in the form of
cash (check or electronic transfer). This transfers economic value from the company to the
shareholders instead of the company using the money for operations. However, this does cause
the company's share price to drop my roughly the same amount as the dividend. For example, if a
company issues a cash dividend equal to 5% of the stock price, shareholders will see a resulting
loss of 5% in the price of their shares. This is a result of the economic value transfer. Another
consequence of cash dividends is that receivers of cash dividends must pay tax on the value of
the distribution, lowering its final value. Cash dividends are beneficial, however, in that they
provide shareholders with regular income on their investment along with exposure to capital
appreciation.

A stock dividend, on the other hand, is an increase in the amount of shares of a company with
the new shares being given to shareholders. For example, if a company was to issue a 5% stock
dividend, it would increase the amount of shares by 5% (1 share for every 20 owned). If there are

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1 million shares in a company, this would translate into an additional 50,000 shares. If you
owned 100 shares in the company, you'd receive five additional shares.
This, however, like the cash dividend, does not increase the value of the company. If the
company was priced at $10 per share, the value of the company would be $10 million. After the
stock dividend, the value will remain the same, but the share price will decrease to $9.52 to
adjust for the dividend payout. The benefit of a stock dividend is choice. The shareholder can
either keep the shares and hope that the company will be able to use the money not paid out in a
cash dividend to earn a better rate of return, or the shareholder could also sell some of the new
shares to create his or her own cash dividend. The biggest benefit of a stock dividend is that
shareholders do not generally have to pay taxes on the value. Taxes do need to be paid, however,
if a stock dividend has a cash-dividend option, even if the shares are kept instead of the cash.

Stock dividends are thought to be superior to cash dividends as long as they are not accompanied
with a cash option. This is due to the choice that stock dividends offer compared to cash
dividends. But this does not mean that cash dividends are bad, they just lack choice; a
shareholder could still reinvest the proceeds from the cash dividend back into the company
through a dividend reinvestment plan.
Retained earning is that portion of net income which is retained in a corporation instead of
distributing it among the shareholders.
Purposes and benefits of Stock dividends:
Corporations issue stock dividends generally for one or more of the following reasons:
1. To satisfy stockholders’ dividend expectations without spending cash.
2. To increase the marketability of the corporation’s stock. When the number of shares
outstanding increases, the market price per share decreases that ultimately helps smaller
investors purchasing the shares.
3. To emphasize that a portion of stockholders’ equity has been permanently reinvested in
the business.
4. It allows the company to increase its equity by issuing new shares. The company thus
keeps a greater share of its annual net profit, which can be particularly interesting at a
time when bank loans are more difficult to obtain.
The size of the stock dividend and the value to be assigned to each share are determined by
the board of directors when the dividend is declared.
Three important dates for dividend:
1. Declaration date
2. Record date
3. Payment date

Problem -1: On March 31, 2019, Flora Company declared a cash dividend of 20% on
its 4,00,000 outstanding shares of common stock (par value TK 10). The record date was
May 31 and the dividend was payable on June 30 of the same year. The amount in the
retained earnings account was adequate for payment of the dividend.

Instructions:
Give all required journal entries, through final payment, directly related to this dividend.

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Solution:
Date Explanation Ref. Dr. Cr.
March 31 Retained earnings 8,00,000
Dividend payable 8,00,000
(To record declaration of dividend)
May 31 No entry
June 30 Dividend payable 8,00,000
Cash 8,00,000
(To record payment of dividend)

Problem-2: The records of Round Corporation showed the following balances on

December 31, 2019:
Capital stock, par TK 10 3,00,000
Share premium 1,02,000
Retained earnings 2,00,000
Total- 6,02,000

On January 25, 2020, the board of directors declared a stock dividend to the stockholders
of record as of February 25, 2020 of one additional share for each five shares already
outstanding; issue date March 31, 2020. The current market value of the stock is TK18
per share. The annual accounting period of the company ends on December 31.

Required:
i) Give entries in parallel columns for the stock dividend assuming, for problem
purposes, (a) Market value is capitalized (b) Par value is capitalized.
ii) Prepare stockholders’ equity section after the distribution of stock dividend

Solution:
No. of shares outstanding = (TK3,00,000 ÷10) = 30,000
No. of shares to be issued as dividend = (30,000÷5) = 6,000

Date Explanation Ref. Par value Market value

Dr. Cr. Dr. Cr.
Jan. 25 Retained earnings 60,000 1,08,000
Stock dividend distributable 60,000 60,000
Share premium - 48,000
(To record declaration of dividend)
Feb. 25 No entry
Mar. 31 Stock dividend distributable 60,000 60,000
Common stock 60,000 60,000
(To record distribution of stock
dividend)

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Stockholders’ equity section:
Par Value Market Value
Capital stock, 36,000 shares, par TK 10 3,60,000 360,000
Share premium 1,02,000 1,50,000
Retained earnings 1,40,000 92,000
Total- 6,02,000 6,02,000

Problem-3: On January 1, 2019, Snider Corporation had the following stockholders’

equity accounts.
Capital stock,TK10 par value, 90,000 shares
issued and outstanding) 9,00,000
Share premium 2,00,000
Retained earnings 5,40,000
During the year, the following transactions occurred:
Jan. 15 Declared a TK 1 cash dividend per share to stockholders of record on
January 31, payable February 15.
Feb. 15 Paid the dividend declared in January.
April 15 Declared a 10%, stock dividend to stockholders of record on April
30, distributable May 15. On April15, the market price of the stock
was TK15 per share.
May 15 Issued the shares for the stock dividend.
Dec. 1 Declared a TK0.50 per share cash dividend to stockholders of record
on December 15, payable January 10, 2020.
Dec. 31 Determined that net income for the year was TK2,50,000.
Instructions:
a. Journalize the transactions and the closing entry for net income.
b. Enter the beginning balances, and post the entries to the stockholders’ equity
accounts (Open additional stockholders’ equity accounts as needed.)
c. Prepare a stockholders’ equity section at December 31.
Solution: (a)
Date Explanation Ref. Dr. Cr.
Jan. 15 Retained earnings 90,000
Dividend payable 90,000
(To record declaration of dividend)
Feb. 15 Dividend payable 90,000
Cash 90,000
(To record payment of dividend)
April 15 Retained earnings 1,35,000
Stock dividend distributable 90,000
Share premium 45,000
(To record declaration of stock dividend)
May 15 Stock dividend distributable 90,000
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 Common stock 90,000
(To record distribution of 9,000 shares as
stock dividend)
Dec. 1 Retained earnings 49,500
Dividend payable 49,500
(To record declaration of dividend of
99,000 shares of common stock)
Dec. 31 Income summary 2,50,000
Retained earnings 2,50,000
(To record transfer of net income)

b.
Common Stock
Date Explanation Ref. Debit Credit Balance
Dr. Cr.
Jan. 1 Balance b/d 9,00,000
May 15 Stock dividend distributable 90,000 9,90,000

Share Premium
Date Explanation Ref. Debit Credit Balance
Dr. Cr.
Jan. 1 Balance b/d 2,00,000
Apr. 15 Retained earnings 45,000 2,45,000

Retained Earnings
Date Explanation Ref. Debit Credit Balance
Dr. Cr.
Jan. 1 Balance b/d 5,40,000
Jan. 15 Dividend payable 90,000 4,50,000
Apr. 15 Stock dividend distributable 90,000 3,60,000
- Share premium 45,000 3,15,000
Dec. 1 Dividend payable 49,500 2,65,500
Dec. 31 Income summary 2,50,000 5,15,500

Dividend Payable
Date Explanation Ref. Debit Credit Balance
Dr. Cr.
Jan. 15 Retained earnings 90,000 90,000
Feb. 15 Cash 90,000 00000
Dec. 1 Retained earnings 49,500 49,500

Stock Dividend Distributable

Date Explanation Ref. Debit Credit Balance
Dr. Cr.
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 Apr. 15 Retained earnings 90,000 90,000
90,000
May 15 Common stock 90,000 00000

c. Stockholders’ Equity Section:

Capital stock, 99,000 shares, par TK 10 9,90,000
Share premium 2,45,000
Retained earnings 5,15,500
Total- 17,50,500

Assignment
1. How do Income statement, Owner’s equity statement, and Balance sheet interrelated?
2. The following data pertain to AMAX Company:

Accounts name Debit Credit

Cash 31,000
Accounts receivable 38,000
Building 70,000
Accumulated depreciation-Building 14,000
Equipments 110,000
Accumulated depreciation-Equip. 17,000
Copyright 6,000
Inventory 40,000
Investment in long-term securities 20,000
Investment in short-term securities 16,000
Land 48,000
Common stock, TK 10 par, 10,000 shares 100,000
authorized, issued, and outstanding
Accounts payable 51,000
Bonds payable 60,000
Share premium 50,000
Prepaid rent 4,000
Retained earnings 88,000
Unearned revenue 3,000
Total- 3,83,000 3,83,000

Required:
Prepare a classified balance sheet at December 31, 200X.

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