Demonstration problem

Solution

Solution to demonstration problem A

VIOLET COMPANY
Assumptions
Year Dividends to a b
2005 Preferred $30,000* $30,000
Common 55,000 55,000
2006 Preferred 30,000 30,000
Common 22,500 22,500
2007 Preferred 7,500 7,500
Common -0- -0-
2008 Preferred 15,000 15,000
Common -0- -0-
2009 Preferred 67,500† 30,000‡
Common -0- 37,500

* 4,000 shares X $125 X 0.06 = $30,000
† $30,000 + $22,500 preferred dividend missed in 2007 + $15,000 preferred dividend missed in 2008.
‡ Only the basic $30,000 dividend is paid because the stock is noncumulative.


Solution to demonstration problem B

a. (1)

Cash (+A) 1,200,000
Common Stock (+SE) 300,000
Paid-In Capital in Excess of Par Value – Common Stock (+SE) 900,000
To record issuance of 50,000 shares at $24 per share.


(2)

Cash (+A) 13,500
Preferred Stock (+SE) 9,000
Paid-In Capital in Excess of Par Value  – Preferred (+SE) 4,500
To record the issuance of 750 shares for cash, at $18 per share.


(3)

Organization Costs (+A) 9,000
Common Stock (+SE) 6,000
Paid-In Capital in Excess of Par Value – Common (+SE) 3,000
To record the issuance of 1,000 shares in exchange for legal services.


b.

TERRIER COMPANY
Partial Balance Sheet
2009 June 30

Paid-in Capital:
Preferred stock – $12 par value, 14% cumulative; 1,000shares authorized; issued and outstanding, 750 shares $ 9,000
Common stock – $6 par value per share; 100,000 shares authorized; issued and outstanding, 51,000 shares 306,000 $ 315,000
Paid-in capital in excess of par value:
From preferred stock issuances $ 4,500
From common stock issuances 903,000 907,500
Total paid-in capital $1,222,500