Question

Prince Observation incorporated on May 1^st, 2020 and was authorized to issue 500,000 common shares and 100,000, 5% non-participating, convertible preferred shares. During the remainder of 2020, the company entered into the following transactions:

• 1.Issued 30,000 common shares in exchanged for $600,000.
• 2.Issued 5,000 preferred shares in exchange for $75,000.
• 3.Repurchased 3,000 common shares for $24.00 per share in the open market.

The company entered into no other transactions that affected shareholders' equity during 2020.

1. Provide the journal entries for each of the transactions.
2. Prince Observation generated $750,000 in net income in 2020 and did not declare any dividends during 2020. Prepare the shareholders' equity section of the statement of financial position as of December 31, 2020.

Answer 1

Requirement a:

Transaction	Account title and explanation	Debit	Credit
1	Cash	$600,000
	Common stock		$600,000
	[To record issuance of common stock]
2	Cash	$75,000
	Preferred stock		$75,000
	[To record issuance of preferred stock]
3	Treasury stock [3,000 x $24]	$72,000
	Cash		$72,000
	[To record purchase of own shares]

Requirement b:

Balance Sheet
At December 31,2020
Paid-in capital:
Common stock	$600,000
Preferred stock	$75,000
Total paid-in capital	$675,000
Retained earnings	$750,000
Total paid-in capital and Retained earnings	$1,425,000
(Less): Treasury stock	($72,000)
Total stockholders' equity	$1,353,000