Problem 19 - Accounting

Question

Big Boy Toys Inc. retails racing products for BMWs, Porsches, and Ferraris. The following accounts and their balances appear in the ledger of Big Boy Toys Inc. on October 31 , the end of the current year: \(\begin{array}{lr}\text { Common Stock, \$4 par } & \$ 600,000 \\ \text { Paid-In Capital in Excess of Par-Common Stock } & 210,000 \\ \text { Paid-In Capital in Excess of Par-Preferred Stock } & 78,000 \\ \text { Paid-In Capital from Sale of Treasury Stock - Common } & 42,000 \\ \text { Preferred 2\% Stock, \$100 par } & 480,000 \\ \text { Retained Earnings } & 3,903,000 \\\ \text { Treasury Stock-Common } & 120,000\end{array}\) Ten thousand shares of preferred and 250,000 shares of common stock are authorized. There are 12,000 shares of common stock held as treasury stock. Prepare the Stockholders' Equity section of the balance sheet as of October 31 , the end of the current year.

Step-by-Step Solution

Answer

Total Stockholders' Equity is $5,193,000.

Step 1: Calculate Preferred Stock

The Preferred Stock account has a balance of $480,000. Since the stock is 2%, $100 par, this amount represents the total par value of preferred stock issued. We do not need any additional calculations for the preferred stock since its complete value is already provided.

Step 2: Calculate Common Stock

Common Stock is reported with the par value and the number of shares issued. Given: \( \text{Common Stock}, \\(4 \text{ par} = \\)600,000 \). With \( \text{par value} = \\(4 \), the number of issued shares = \( \frac{\\)600,000}{\$4} = 150,000 \) shares.

Step 3: Calculate Additional Paid-In Capital for Common Stock

The Paid-In Capital in Excess of Par for Common Stock is directly given as \(210,000. This represents the amount received in excess of \( \\)4 \times 150,000 \text{ shares} = \$600,000 \) par value issued.

Step 4: Add Paid-In Capital for Preferred Stock

The Paid-In Capital in Excess of Par for Preferred Stock is given as $78,000. This is simply added to the Stockholders' Equity under its separate line.

Step 5: Consider the Paid-In Capital from Treasury Stock

The Paid-In Capital from Sale of Treasury Stock is $42,000. This amount is a part of additional paid-in capital and should be included separately in the stockholders' equity section.

Step 6: Account for Retained Earnings

Retained Earnings are reported as $3,903,000. This amount is a major component of stockholders' equity and is listed separately from paid-in capital.

Step 7: Deduct Treasury Stock from Equity

The Treasury Stock (Common) has a balance of $120,000. This amount is subtracted from the total stockholders' equity as treasury stock reduces equity because it represents the company's repurchase of its own shares.

Step 8: Compile Stockholders' Equity Section

List out each component gathered from steps above:- Preferred Stock: \(480,000 - Additional Paid-In Capital: \)78,000 - Common Stock: \(600,000 - Paid-In Capital in Excess of Par: \)210,000 - Paid-In Capital from Sale of Treasury Stock: \(42,000 - Retained Earnings: \)3,903,000 - (Less) Treasury Stock: \(120,000 Add these amounts to calculate total stockholders' equity:\[ \text{Total Stockholders' Equity} = \\)480,000 + \\(78,000 + \\)600,000 + \\(210,000 + \\)42,000 + \\(3,903,000 - \\)120,000 = \$5,193,000 \]

Step 9: Structure the Balance Sheet

Format the Stockholders' Equity section of the balance sheet as follows: Stockholders' Equity: - Preferred Stock, 2%, $100 par: $480,000 - Paid-In Capital in Excess of Par - Preferred Stock: $78,000 - Common Stock, $4 par: $600,000 - Paid-In Capital in Excess of Par - Common Stock: $210,000 - Paid-In Capital from Sale of Treasury Stock: $42,000 - Retained Earnings: $3,903,000 - (Less) Treasury Stock: $120,000 **Total Stockholders' Equity: $5,193,000**

Key Concepts

Balance Sheet Preparation

The balance sheet is a financial statement that presents a company's financial position at a specific point in time. It consists of three main parts: assets, liabilities, and stockholders' equity. When preparing a balance sheet, it's essential to ensure that everything accurately reflects the company's financial status. The end goal is to create a document where total assets equal the sum of total liabilities and stockholders' equity.

The Stockholders' Equity section represents the owners' claim after all liabilities have been settled. It's a pivotal part of the balance sheet for understanding the intrinsic value shared among stockholders. This section includes items such as common stock, preferred stock, additional paid-in capital, retained earnings, and sometimes treasury stock.

• Assets - The resources owned by the company.
• Liabilities - The obligations the company has to outside parties.
• Stockholders' Equity - The residual interest in the assets on behalf of shareholders.

Balance sheet preparation requires meticulous addition and subtraction calculations to depict economic activities accurately. For Big Boy Toys Inc., preparation involves listing the preferred and common stocks, additional paid-in capitals, retained earnings, and deducting any treasury stock from the calculation.

Common Stock Calculation

Common stock is a fundamental part of stockholders' equity, representing ownership in a company and a claim on a portion of profits. For Big Boy Toys Inc., the common stock is reported at par value, and with 250,000 shares authorized, understanding this concept helps in analyzing ownership and share distribution.

The calculation involves multiplying the number of shares issued by the par value to determine the total value. If Big Boy Toys Inc. has issued 150,000 shares at a \(4 par value, then:\[ ext{Common Stock} = 150,000 ext{ shares} \times \\)4 = \$600,000 \]
Any amount received in excess of the par value is recorded under "Paid-In Capital in Excess of Par." The additional paid-in capital for common stock demonstrates the extra money investors are willing to pay above the par value, showing the company's growth potential and investor confidence.

Preferred Stock Valuation

Preferred stock is a hybrid between bonds and common stock, offering more stability and fixed dividends. It's crucial for companies like Big Boy Toys Inc. to account for it accurately. Preferred stockholders typically receive dividends before common stockholders and have priority in certain liquidation events.

The valuation of preferred stock involves considering both its par value and any additional paid-in capital. In this instance, the total par value is \(480,000 for Big Boy Toys Inc. Given the dividend rate and par value, it represents ownership capital since each share has a designated value.

Calculating preferred stock starts with ensuring the number of shares issued aligns with the company's authorized shares. With 10,000 shares granted at \)100 par, the full value aligns with issued stock. Therefore:\[ ext{Preferred Stock Value} = \$480,000 \]Being aware of preferred stockholders' rights and privileges is key for investors when valuing these share types.

Treasury Stock Accounting

Treasury stock refers to shares a company has repurchased from its shareholders. They can be reissued or canceled and do not pay dividends while held as treasury stock. For accounting purposes, treasury stock decreases stockholders' equity because it's considered a reduction of outstanding shares.

At Big Boy Toys Inc., treasury stock was recorded at $120,000, representing a reducing factor to stockholders' equity. The accounting process for treasury stock involves deducting its value from total equity since it's essentially a re-acquisition of shares previously issued.

To reflect it in the balance sheet, it appears as a negative entry within stockholders' equity. It's crucial to distinguish these shares from regular outstanding shares to understand the company's actual size and market value. This entry helps in precise financial reporting and provides insights into how firms manage their equity capital strategy.