The shareholders’ equity' section of Gaines Industries’ balance sheet appeared as follows’ at December 31, 2015:
Contributed Capital:
Preferred stock, 8%, $100 par (5,000 shares authorized, 3,000
shares issued) .......................... $ 300,000
Common stock, $ 10 par (25,000 shares authorized, 20,000
shares issued of which 500 shares are being held as treasury stock)..... 200,000
Additional paid-in capital on preferred stock ............ 120,000
Additional paid-in capital on common stock ............. 280,000
Common stock option warrants .................. 32,000
Total contributed capital ..................... $ 932,000
Retained earnings ....................... 260,000
Total contributed capital and retained earnings ............$1,192,000
Less: Treasury stock (500 common shares at $31) ............ (15,500)
Total Shareholders' Equity .....................$1,176,500
During 2016, the following chronological transactions were recorded:
1. Gaines issued 1,000 shares of common stock for $40 per share.
2. Gaines has a share option plan for key executives. In accordance with the plan, the shares under option and the option price per share for each executive arc known on the grant date. During 2016, no new options were granted, and compensation expense of $3,000 was recorded in regard to the existing options.
3. Share options to 500 common shares were exercised in 2016 at an option price of $30 per share. The share option value originally recorded in the Common Stock Option Warrants account in regard to these shares amounted to $3 per share.
4. Gaines reissued 200 shares of its treasury stock for $41 per share.
5. Gaines accepted land in an industrial park for a factory' building site from the Columbus Development Association. The lair value of the land is estimated by an independent appraiser to be $50,000.
6. The law firm of Crook, Rezich, and Romero agreed to accept 100 shares of preferred stock in lieu of legal fees. At the time, the preferred stock was selling for $142 per share.
7. Net income for 2016 of $182,000 was transferred from Income Summary' to Retained Earnings. Dividends on preferred and common were $24,800 and $43,000, respectively (debit Retained Earnings and credit Cash).
Required:
1. Prepare journal entries to record the preceding 2016 transactions for Gaines.
2. Prepare the statement of shareholders* equity' for 2016.
3. Prepare the shareholders’ equity' section of the December 31, 2016, balance sheet. Include appropriate notes to the financial statements.
4. Compute the return on shareholders’ equity' for 2016.