Tandem Corporation issued 200000 shares of 2 par value capit

Tandem Corporation issued 200,000 shares of $2 par value capital stock at date of incorporation for cash at a price of $7 per share. During the first year of operations, the company earned $80,000 and declared a dividend of $25,000. At the end of this first year of operations, the balance of the Common Stock account is:

a- $1,400,000

b- $1,480,000

c- $400,000

d- $1,4550,000

please show work, thank!!

Solution

Tandem Corporation issued 200,000 shares of $2 par value capital stock at the date of incorporation for cash at a price of $7 per share. In this case, credit to the common stock account is the par value times the number of shares issued.Hence, the common stock account would be credited by $400,000 i.e. 200,000 x 2. Excess over par value(200,000 x 5 = $1,000,000) would be credited to paid-in capital in excess of par value.

During the first year of operations, the company earned $80,000 and declared a dividend of $25,000. Hence retained earnings of the company would increase by $55,000. But retained earnings are not a part of common stock. Hence, $55,000 i.e. retained earnings would not be added to the common stock to find the balance of common stock account at the end of the first year.

Common stock and retained earnings both are a part of shareholders\' equity. If we want to calculate shareholders\' equity at the end of the year, then we would add retained earnings to the common stock.

Hence, common stock at the end of the first year would be $400,000.

Hence, correct option is (c)