Q50. Review questions 5
(1) Entity A issued 20,000 shares of common stock at $26 per share. The par value of common stock is $1 per share.
(2) Entity B declared a cash dividend: $1.20 per share on 400,000 shares of common stock.
Prepare journal entries to record these transactions.
A50. Issuance of common stock and cash dividend
(1) Entity A issued 20,000 shares of common stock at $26 per share. The par value of common stock is $1 per share.
| debit | credit | |
|---|---|---|
| Cash | 520,000 | |
| Common stock, par value | 20,000 | |
| Additional paid-in capital | 500,000 |
[Note]
1. Par value portion is recorded in the common stock, par value account.
2. Issue price over the par value is recorded in the additional paid-in capital account.
3. Common stock, par value = 20,000 shares x $1 par value = $20,000
4. Additional paid-in capital = $520,000 – $20,000 = $500,000
(2) Cash dividend declared: $1.20 per share on 400,000 shares of common stock.
| Debit | Credit | |
| Retained earnings (or cash dividend) | 480,000 | |
| Dividends payable | 480,000 |
[Note]
1. Dividends payable = 400,000 shares x $1.20 per share = $480,000
2. When a cash dividend is declared, retained earnings account decreases and the dividends payable account increases.