The business prospers to such an extent that the profits provide sufficient money and it is not likely that the stockholders will be called upon for further payments. It is decided to reduce the stock to $5,000.00 and to declare a dividend to make this stock full paid. The entries for these transactions follow:
| Capital stock | 10,000.00 | |
| Subscriptions | 10,000.00 | |
| Capital stock reduced in accordance with resolution of board of directors passed Jan. 27, 1909. | ||
| ———— | ||
| Surplus | 1,250.00 | |
| Dividends payable | 1,250.00 | |
| Dividend declared by board of directors Jan. 27, 1909, payable immediately. | ||
| ———— | ||
| Dividends payable | 1,250.00 | |
| Subscriptions | 1,250.00 | |
| Dividends applied to the payment of stock subscriptions. | ||
The original stock certificates are now surrendered and new ones issued in their place. In the stock ledger the stockholders are debited and capital stock credited for the shares surrendered. Then, capital stock is debited and stockholders credited for the new shares issued.
It might happen that a corporation wishes to reduce the capital stock held by stockholders without having it appear that capital stock has been reduced. This has been done by purchasing its stock and placing it in the treasury. Payment for the stock may be made in cash or notes, or it may be taken from surplus. The entries would be—
| Treasury stock | 10,000.00 | |
| Cash | 10,000.00 | |
| or | ||
| Treasury stock | 10,000.00 | |
| Bills payable | 10,000.00 | |
| or | ||
| Treasury stock | 10,000.00 | |
| Surplus | 10,000.00 |
If the capital stock is to be reduced on the books, capital stock will take the place of treasury stock in these entries as—
| Capital stock | 10,000.00 | |
| Cash | 10,000.00 |
EXERCISES
1. Parsons, Young, and Searles are partners and decide to form a corporation with capital stock of $40,000.00, which is to be issued as full paid stock in exchange for their present business. Each partner is to receive stock in proportion to his interest in the present business. The balance sheet of the partnership is as follows:
| Assets | ||
| Cash | 3,500.00 | |
| Bills receivable | 6,000.00 | |
| Accounts receivable | 6,500.00 | |
| Merchandise | 14,000.00 | |
| ———— | ||
| Total | 30,000.00 | |
| Liabilities | ||
| Bills payable | 4,000.00 | |
| Accounts payable | 2,000.00 | |
| Parsons | 10,000.00 | |
| Young | 8,000.00 | |
| Searles | 6,000.00 | |
| ———— | ||
| Total | 30,000.00 | |