Company A

During 2013, Company A has the following transactions involving its common and preferred stock:

• Issued 20,000 shares of $8 par common stock for $26 a share;brings total shares outstanding to 50,000 shares
• Issued 6,000 shares of $100 par, 6%, cumulative preferred stock for $150 per share
• When market value of the common stock reached $15 a share, Company A declared a 3-for-1 stock split, reducing the par value to $188 per share

The following is required:

1. Prepare a journal entry for each transaction.
2. Discuss the right of shareholders of capital stock for company A that they are entitled to.
3. Company A is formed as a corporation and therefore, its shareholders have limited liability. Limited liability means that stockholders can only lose the amount of their investment. Discuss how this limited liability affects a corporation.

Company B

Company B began 2013 with a $110,000 balance in retained earnings. The following events occurred during the year:

• Cash dividends of $18,500 were declared.
• 4,500 shares of callable preferred stock were recalled and retired for a price of $225 per share. The stock was originally issued for $150 per share.
• Net income was $550,000.
• A material error in net income for a previous period was corrected. The correction of the error decreased retained earnings by $18,500 after a related income tax.

The following is required:

1. Prepare the statement of retained earnings for the year ended 2013, and any note disclosures separately.
2. Discuss the restriction of retained earnings that the board of directors can impose and why it would be necessary.