Demo Problem for Chapter 11

Question #1

This case focuses on the organization and operations for the first year of Shelly Corporation, which was organized by 10 local entrepreneurs on January 1, 2003, for the purpose of operating a business to sell various supplies to hotels. The charter authorized the following capital stock: Common stock, no-par value, 20,000 shares Preferred stock, 5 percent, $100 par value, 5,000 shares The laws of the state specify that the legal capital for no-par stock is the full sale amount. The following summarized transactions, selected from 2003, were completed on the dates indicated: a. Jan. Sold a total of 8,000 shares of common stock to the 10 entrepreneurs for cash at $50 per share. Credit the Common Stock account for the total issue amount. b. Feb. Sold 2,000 shares of preferred stock at $102 per share; cash collected in full. c. Mar. Purchased land for a store site and made full payment by issuing 100 shares of preferred stock. Early construction of the store is planned. Debit Land (store site). The preferred stock is selling at $102 per share. d. July Purchased 100 shares of preferred stock that had been sold and issued earlier. Shelly Corporation paid the stockholder $104 per share. e. Aug. Sold 20 shares of the preferred treasury stock at $105 per share.

Requirement 1: Give the appropriate journal entries with a brief explanation for each transaction.

General Journal a. Cash Common stock Cash Preferred stock Capital in excess of par Land Preferred stock Capital in excess of par Treasury stock Cash Cash Treasury stock Capital in excess of par

Debit 400,000

Credit 400,000

b.

204,000 200,000 4,000 10,200 10,000 200 10,400 10,400 2,100 2,080 20

c.

d.

e.

Requirement 2: Prepare the Stockholders' Equity section of the balance sheet for Shelly Corporation at December 31, 2003. Assume retained earnings is $31,000.

(Omit the "$" sign in your response. Amounts in parentheses do not require a minus sign in front of them.)

Shelly Corporation Balance Sheet At December 31, 2003 Stockholder's Equity Contributed Capital Preferred stock Capital in excess of par, preferred stock Common stock Total contributed capital Retained earnings Total contributed capital and retained earnings Less cost of preferred treasury stock held Total stockholders' equity $ 210,000 4,220 400,000 $ 614,220 31,000 $ 645,220 ( 8,320 )

$ 636,900

Question #2
During 2005, the following selected transactions affecting stockholders' equity occurred for Harpo Corporation: Feb. Jul. Sept. 1 Purchased in the open market 170 shares of the company's own common stock at $24 cash per share. 15 Sold 90 of the shares purchased on February 1, 2005, for $26 cash per share. 1 Sold 50 more of the shares purchased on February 1, 2005, for $21 cash per share.

Dec. 15 Sold an additional 10 of the treasury shares for $15 per share Requirement 1: Give the journal entries for each transaction. (Omit the "$" sign in your response.) Date Feb. 1 General Journal Treasury stock, common Cash Debit 4,080 4,080 Credit

Jul. 15 Cash 2,340 Treasury stock, common Contributed capital, treasury stock transactions Sept. 1 Cash 1,050 Contributed capital, treasury stock transactions 150 Treasury stock, common Dec. 15 Cash 150 Contributed capital, treasury stock transactions 30 Retained earnings 60 Treasury stock

2,160 180

1,200

240

Requirement 2: What impact does the purchase of treasury stock

have on dividends paid?

Cash dividends paid is

Reduced

Requirement 3: What impact does the sale of treasury stock for an amount higher than the purchase price have on net income and the statement of cash flows? Net income is Statement of cash flows indicates Unchanged An inflow