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Week 14 · Assignment: Traditional alternative (no AI)

Week 14 — Paid In, Handed Back, Bought Back: The Shop's Year 2 Equity — Traditional alternative (no AI)

Financial Accounting Free sample edition
Traditional alternative (no AI), unpublished. In the course this is a separate assignment that ships unpublished beside the adaptive assignment: same objective, no AI. An instructor who prefers it publishes it and unpublishes or deletes the adaptive one, as the note at its top says.

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 13 of the term — record the bicycle shop's Year 2 stock issue, dividend, and buyback, build its equity total and earnings per share, and set a founder straight about what owners' money is and is not.

This week you met the corporate form, shares and par value, stock issued above par, preferred stock, cash dividends and their three dates, stock dividends and splits, treasury stock, the equity statements, and basic earnings per share. In this assignment you work four short problems on the bicycle shop's Year 2 equity, interpret each one, and explain this week's ideas to someone who has them wrong. This week's lecture tutorial, quiz, discussion, and Accounting Workshop practise the same ideas from other angles. It builds on Week 5, where you prepared the statement of retained earnings and closed Dividends to Retained Earnings.

The task

This week's material is pinned. When common stock is issued above par, Common Stock is credited for par and Additional Paid-in Capital for the rest; par value is a legal amount per share, not market value. A cash dividend is recorded as a liability, Dividends Payable, on the declaration date, gets no entry on the record date, and is paid on the payment date; a dividend is a distribution to owners, never an expense. Treasury stock is a corporation's own shares that it has reacquired and not retired, recorded at cost and reported as a deduction from stockholders' equity; it reduces shares outstanding but not shares issued. Basic earnings per share is net income minus preferred dividends, divided by the weighted-average common shares outstanding.

The running case is an illustrative, unnamed bicycle repair and sales shop, organized as a corporation by two founders; it describes no real business. Its charter authorizes 100,000 shares of $1-par common stock, and the founders already hold 30,000 shares. In Year 2 the shop sells new shares, declares and pays a cash dividend, and buys back some of its own shares.

One of the founders (an illustrative person) sends you this message: "Let's put the $7,000 dividend with our expenses, since it's money going out. The $10,000 of shares we bought back should go with our assets, because we paid cash for them. And since our par value is $1, our shares are only worth $1 each." Your job is to answer the way this course would, starting from four small calculations on the shop's books.

Work these four problems, showing your arithmetic:

  1. On the first day of Year 2, the bicycle shop issues 5,000 shares of its $1-par common stock for $9 a share. How many dollars does the entry credit to Additional Paid-in Capital?
  2. The bicycle shop's board declares a cash dividend of $0.20 a share on its 35,000 outstanding shares. How many dollars is the dividend?
  3. At the end of Year 2, the bicycle shop has Common Stock of $35,000, Additional Paid-in Capital of $40,000, Retained Earnings of $75,000, and Treasury Stock of $10,000 at cost. How many dollars is total stockholders' equity?
  4. The bicycle shop has no preferred stock and earns net income of $69,000 in Year 2. It had 35,000 common shares outstanding for the first half of the year and 34,000 for the second half. How many dollars is its basic earnings per share?

Beside each answer, add one brief interpretation:

  • Problem 1: write the issue entry as a journal entry, debit first and credits second; explain why Common Stock takes only part of the cash; and give the shares issued after the issue.
  • Problem 2: write the entries for the declaration date and the payment date; say why the record date gets no entry; and say whether the dividend is an expense.
  • Problem 3: write the entry for the shop's buyback of 1,000 shares at $10; explain why treasury stock is subtracted rather than listed as an asset; and give the shares issued and outstanding after the buyback.
  • Problem 4: give the weighted-average common shares outstanding; and explain why the year-end share count is not the divisor.

Explain it to a non-expert

The founder means well and has three things wrong. Write a 3–5 sentence message that explains why the dividend is not an expense, why the bought-back shares are not an asset, and why par value is not what a share is worth. Name one limit, such as that these figures are illustrative or that this course gives no investment advice. Explain any technical term in everyday words. More than one good answer is possible.

For a different, ungraded example, imagine a friend who belongs to a neighborhood tool library and says, "The fees members paid to join are the library's income, right?" Model answer: "Not quite. When members pay to join, they are buying a share of the library, so that money is part of what the members own, not money the library earned by lending tools. Income comes from the library's own work, such as late fees or rental charges. A fair caveat: groups organize themselves in different ways, so check how this one records its joining fees."

Use that pattern for the founder, with your own wording and evidence.

Show your arithmetic. A reader should be able to reproduce every number you report from the figures in the problems without guessing which figures or steps you used.

Deliverables

Submit a single report containing:

  • the four results, each with the multiplication, subtraction, or division shown and the brief interpretation the task names for that problem;
  • the journal entries: the stock issue, the dividend's declaration-date and payment-date entries, and the treasury stock purchase, each with the debit first, the credit second, and equal amounts;
  • the shares issued and outstanding after the issue and after the buyback;
  • your message to the founder, explaining why the dividend is not an expense, why the bought-back shares are not an asset, and why par value is not what a share is worth, with one limit; and
  • a one-line restatement of the figures you used, so your results are reproducible.

Keep it to roughly one page. Clear and correct beats long.

Choose how you show it. Present your report as written text, or as a recorded audio or video explanation of about three minutes with a transcript, or as a labelled spreadsheet of the equity section and the entries with a short explanation. Every form is graded by the same scoring criteria. Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

This version is designed to be completed without AI: do the arithmetic, the entries, the interpretations, and the writing yourself. You may use a calculator or a spreadsheet for the arithmetic. State a rule only as the course states it, check every entry so that its debits equal its credits, and give no tax, legal, or investment advice. Submitting work you did not write as your own, or copying another student's work, is an integrity violation under the course policy.

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