Marcel Canpos and Fidel Feisthamel have operated their company as a partnership for several years. Over the years, the company has grown, and the partners believe that it is appropriate to incorporate their company (as Camphamel Limited) and raise more capital to expand to further geographic areas. Accordingly, Marcel and Fidel engaged a qualified bookkeeper to provide accounting services for their new corporation. The corporate charter authorized the company to issue an unlimited number of common stock to a maximum value of $10,000,000, and 100,000 3% preferred stock worth $100 each. On March 3, 20×1, the partners transferred assets worth $2,000,000 and liabilities worth $1,250,000 to the company in exchange for 20,000 shares of stock.

Then, Marcel and Fidel proceeded to seek investment capital from private investors. On April 15, 20×1, a group of investors agreed to buy a further 20,000 stock for $1,000,000 cash.

Instead of paying the accountant $100,000 of fees in cash, Marcel and Fidelgave the accountant 1,000 3% preferred stock on April 30, 20×1. (These shares have a total value of $100,000)

For the year ended December 31, 20×1, the newly incorporated company made a net income of $200,000. At the directors’ meeting held on January 15, 20×2, Marcel, Fidel, and a director appointed by the private investors decided to pay out a total of 5% of the net income to preferred and common shareholders of record on January 30, 20×2. The dividend is to be paid on February 28, 20×2. During the period January 1 – February 28, 20×2, the company
produced net income of $30,000.

Required:

  1. Record the required journal entries
  2. Prepare the statement of retained earnings for the year 20×1, and for the period January 1 to February 28, 20×2
  3. Prepare the stockholders’ equity section of the balance sheet as at December 31, 20×1.

Answer and Suggestions