Knapp Industries began business on January 1, 2018 by issuing all of its 1,450,000 authorized shares of its $1 par value common stock for $28 per share. On June 30, Knapp declared a cash dividend of $3.00 per share to stockholders of record on July 31. Knapp paid the cash dividend on August 30. On November 1, Knapp reacquired 290,000 of its own shares of stock for $33 per share. On December 22, Knapp resold 145,000 of these shares for $39 per share. Required:
Prepare all of the necessary journal entries to record the events described above.
Prepare the stockholders' equity section of the balance sheet as of December 31, 2018 assuming that the net income for the year was $7,000,000.

Answer and Explanation:

The Journal entries are shown below:-

1. Cash Dr, $4,06,00,000 (14,50,000 × $28)

         To Common Stock Dr, $14,50,000  (14,50,000 × $1)

          To Paid in Capital in Excess of par value - Common Stock $3,91,50,000

(Being issue of shares at the premium is recorded)

2. Dividend Dr, $43,50,000 (14,50,000 × $3)

            To Dividend Payable $43,50,000

(Being declaration of the cash dividend is recorded)

3. Dividend payable Dr, $43,50,000

                       To Cash $43,50,000

(Being payment of cash dividend is recorded)

4. Treasury Stock Dr, $95,70,000 (2,90,000 × $33)

                  To Cash $95,70,000

(Being Purchase of the Treasury stock is recorded)

5. Cash Dr, $56,55,000 (1,45,000 × $39)

         To Treasury Stock $47,85,000 (1,45,000 × $33)

         To Paid in Capital in Excess of par value - Common Stock $8,70,000

(Being Reissue of the stock is recorded)

B. The Preparation of stockholders' equity section of the balance sheet as of December 31, 2018 is prepared below:-

                                  Stockholder's Equity

                        For the year ended 31 Dec, 2018

Particulars                                                             Amount

Paid in Capital

Common Stock                                                    $14,50,000

Paid in Capital in excess of Par - Common       $3,91,50,000

Paid in Capital in excess of Par - Treasury         $8,70,000

Retained Earnings ($7,000,000)

Less: Dividend     ($43,50,000)‬                          $26,50,000

Less: Treasury Stock                                           ($47,85,000)

Total Stockholder's Equity                                  $3,93,35,000

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