First, we want to begin with the shareholders' equity on January 1, 2012, which is $3,125,500. We want to add net income to this, because this net income represents profit after expenses that belongs ultimately to the shareholders of the company. Doing this, we see: $3,125,500 + $575,325 = $3,700,825. When dividends are declared, the cash distributed no longer is the property of the corporation, it becomes the shareholders' property to do whatever they wish with dividend cash; thus, we subtract cash dividends paid in our computation of retained earnings: $3,700,825 - $125,000 = $3,575,825.
When the corp. issues 10000 shares, it collects $9*10000=$90,000 cash. It correspondingly increases the shareholders' equity by $90,000, by increasing two accounts, common stock and paid in capital - common stock. Thus, Shareholders' Equity is now $3,575,825 + $90,000 = $3,665,825
Common stock repurchases equate to 5000 * $9.75 = $48,750 total in value. This is being held as treasury stock. Reissued (sold) treasury stock has total value of 1,500 * $9.25 = $13,875. When repurchased, the company reduces Cash and correspondingly decreases the Treasury stock and Paid in capital - Treasury stock accounts. Thus, Shareholders' equity decreases by the value of $48,750. ($3,665,825 - $48,750 = $3,617,075) However, when reissuing T-Stock, the company collects cash and increases the shareholders' equity accounts mentioned above; thus, it adds the $13,875 ($3,617,075 + $13,875= $3,630,950). If you were calculating Retained earnings, though, the computation would differ.
There are two types of stock dividends: large and small. Each of these has separate consequences on shareholders' equity. A large stock dividend is when the quantity of stock issued is so great that the market price is substantially affected. This is likely not the case here, so I will assume a small stock dividend. This only changes the composition of the Shareholders' Equity accounts in the owners' equity section of the balance sheet, without affecting total shareholders' equity. (Note, if you were preparing the more specific Retained Earnings Statement, it WOULD change from this transaction). So, for this purpose, the issuance of 2000 shares @ $5 par doesn't affect shareholders' equity in total.
Therefore, Shareholders' Equity at the conclusion of 2012 is $3,630,950. Remember, shareholders' equity is calculated similarly to retained earnings statements, but there are subtle differences as explained above with the Treasury Stock transaction and stock dividend.
Retained Earnings are computed as Beginning RE + NI - Div declared - T-Stock reissued. This feeds in to Shareholders' Equity which is beg. Sh Eq + RE +/- stock transactions.
Thank You Bill! Your explanation was very clear really helped.
110. The Squash Company's shareholders' equity on January 1, 2012 was $3,125,500. During 2012, Squash Company reported the following:
? Net income of $575,325.
? Declared cash dividends totaling $125,000; the dividends had not been paid as of December 31, 2012.
? Issued 10,000 shares of $5 par value common stock at $9 per share.
? Purchased 5,000 shares of its common stock for $9.75 per share; the shares are being held as treasury shares.
? Sold 1,500 shares of treasury stock for $9.25 per share.
? Issued 2,000 shares of $5 par value common stock resulting from the declaration of a stock dividend during 2012; the market value of the common stock on the date of declaration was $10.25 per share.
What was shareholders' equity as of December 31, 2012?
Please explain the numbers used for i am stumped =(.... brief explanation would very much help! Thank you for anyone who takes the time to do this problem you are a great person...
