Problem 17 - Accounting

Question

The following accounts and their balances were selected from the unadjusted trial balance of Sailors Inc., a freight forwarder, at August 31 , the end of the current fiscal year: \(\begin{array}{lr}\text { Preferred 2\% Stock, } \$ 100 \text { par } & \$ 750,000 \\ \text { Paid-In Capital in Excess of Par-Preferred Stock } & 90,000 \\ \text { Common Stock, no par, } \$ 5 \text { stated value } & 562,500 \\ \text { Paid-In Capital in Excess of Stated Value-Common Stock } & 75,000 \\ \text { Paid-In Capital from Sale of Treasury Stock } & 63,750 \\\ \text { Retained Earnings } & 1,875,000\end{array}\) Prepare the Paid-In Capital portion of the Stockholders' Equity section of the balance sheet. There are 200,000 shares of common stock authorized and 80,000 shares of preferred stock authorized.

Step-by-Step Solution

Answer

Total Paid-In Capital is $1,541,250.

Step 1: Understand the Account Types

The Paid-In Capital portion of Stockholders' Equity represents the amounts shareholders have invested in the company. This primarily involves preferred stock, common stock, and the additional amounts over par or stated value.

Step 2: Determine Preferred Stock Contributions

The preferred stock's value is derived from its par value and any excess paid over this par value for shares issued. The given preferred stock amount on the unadjusted trial balance is $750,000 and the Paid-In Capital in Excess of Par for Preferred Stock is $90,000. Combine these amounts: Preferred Stock = $750,000 Paid-In Capital in Excess of Par-Preferred Stock = $90,000.

Step 3: Determine Common Stock Contributions

The common stock amount reflects the stated value of the non-par shares issued, as well as any excess contributions over this amount stated. The given amount of Common Stock is $562,500 with additional Paid-In Capital in Excess of Stated Value-Common Stock at $75,000. Combine these amounts: Common Stock = $562,500 Paid-In Capital in Excess of Stated Value-Common Stock = $75,000.

Step 4: Include Paid-In Capital from Sale of Treasury Stock

The remaining Paid-In Capital from the sale of treasury stock helps form the total Paid-In Capital. The statement lists this amount as $63,750.

Step 5: Prepare the Paid-In Capital Section

Combine the values from Steps 2, 3, and 4 to form the full Paid-In Capital portion: Preferred Stock (2%, $100 par): $750,000 Paid-In Capital in Excess of Par-Preferred Stock: $90,000 Common Stock (no par, $5 stated value): $562,500 Paid-In Capital in Excess of Stated Value-Common Stock: $75,000 Paid-In Capital from Sale of Treasury Stock: $63,750 Sum these contributions for the total Paid-In Capital.

Key Concepts

Paid-In Capital

Paid-In Capital represents the amount of money that shareholders have paid into a company in exchange for shares of stock. This is a crucial component of a company's stockholders' equity and typically comprises paid-in capital in excess of par or stated value as well as any amounts received from the sale of treasury stock.
To understand how it works, think of it as the investment made by shareholders during the company's stock issuances:

• Par Value: A nominal value assigned to preferred shares.
• Stated Value: Similar to par for common shares without a nominal par value.
• Excess Amounts: Anything paid by investors over the par or stated value when buying shares.

Combining these, the Paid-In Capital section of equity reflects not only the face value of shares issued but also the premiums investors are willing to pay. This indicates their confidence in the company's potential for future growth.

Preferred Stock

Preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Therefore, preferred shareholders typically receive dividends before common shareholders do.
The preferred stock in the exercise is described as "2% Stock, $100 par," meaning each share has a par value of $100 and pays an annual dividend of 2% of this value. The declared preferred stock amount is $750,000, with additional paid-in capital in excess of par totaling $90,000. Here's why preferred stock matters:

• Priority on Dividends: Shareholders receive fixed, regular dividends before common stockholders.
• Less Risky: More stable investment options as they often involve less risk due to set dividends.
• Non-voting: Typically do not come with voting rights in company decisions.

Preferred stock is an appealing option for investors looking for reliable income streams, making it a strategic way for companies to raise capital without diluting voting control.

Common Stock

Common stock is a form of corporate equity ownership that provides shareholders with voting rights at shareholder meetings. Unlike preferred stock, common shareholders are lower in claim priority for company profits and assets. In this exercise, the common stock has no par but a stated value of $5, with a total of $562,500 as the base contribution and a further $75,000 from the paid-in capital in excess of stated value. Here's why common stock is vital:

• Voting Rights: Common stockholders can influence corporate decisions through votes during meetings.
• Dividend Potential: Dividends are variable and dependent on company profits, potentially yielding high returns.
• Capital Appreciation: Shareholders are entitled to potential increases in stock value over time, offering long-term growth prospects.

Common stockholders, therefore, may gain substantial benefits if the company performs well, though they undertake a higher risk compared to preferred stockholders due to the lack of guaranteed dividends.