Retro Corp. began business January 1, 2008. The following transactions, impacting owners‟ equity, occurred between January 1, 2008 and December 31, 2010 (the current date):
1) Received authorization to issue 100,000 shares of $1 par value common stock. During 2008, 60,000 shares were issued at $30 per share.
2) Received authorization to issue 50,000 shares of 5%, $10 par value, cumulative, convertible preferred stock. The conversion ratio is 1 share of common for each share of preferred. During 2008, issued 40,000 shares at $100 per share (no shares have been converted into common).
3) On July 1, 2009, granted 2,000 compensatory stock options to company executives. Each option allows the purchase of one share of common stock at $40 per share. The options are exercisable beginning July 1, 2011. At the date of grant, an option pricing model indicated a total compensation expense of $10,000.
4) On October 31, 2009, declared a 10% common stock dividend which was issued December 1st (i.e. the dividend was payable TO common stockholders and the payment was in the form of additional shares of common stock). At the time the dividend was declared, the market price of the common shares was $43.
5) On March 31, 2010, purchased 5,000 shares of the company‟s own common stock for the treasury at $45 per share.
6) On November 30, 2010, reissued 1,200 of the treasury shares for $42 per share.
Net income and cash dividends paid during 2008, 2009, & 2010 are as follow:
Net Income Dividends-C/S Dividends-P/S
2008 $250,000 $ 60,000 $20,000
2009 $400,000* $100,000 $20,000
2010 $300,000* $0 $0
*NOTE: this figure includes accrued compensation expense related to the stock options granted in transaction #3.
1. Prepare journal entries related to transactions 1-6 above.
2. Prepare the December 31, 2010 Owners‟ Equity section of Retro‟s balance sheet. Also include:
• Relevant descriptions for accounts (i.e. for Common Stock, the number of shares authorized, issued, and outstanding, etc.
• Separate Additional Paid In Capital accounts for each type of transaction (i.e., Additional Paid In Capital – Preferred Stock, Additional Paid In Capital –Common Stock, Additional Paid In Capital -Stock Options, etc.).
(Hint: even though you are not required to prepare entries for net income and dividends, you need to “mentally” adjust retained earnings for those amounts.)
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