Concept explainers
1.
Journalize the given transaction.
1.
Explanation of Solution
Retained earnings:
Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.
Prepare
Date | Account Titles and explanation | Debit ($) | Credit ($) |
Retained earnings | 12,000 | ||
Dividend payable | 12,000 | ||
( To record declaration of cash dividend) |
(Table 1)
- Retained earnings are a component of
stockholders equity and there is a decrease in the value of the retained earnings. Hence, debit the retained earnings by $12,000. - Dividend payable is a liability and there is an increase in the value of liability. Hence, credit the dividend payable by $12,000.
Date | Account Titles and explanation | Debit ($) | Credit ($) |
Dividend payable | 12,000 | ||
Cash | 12,000 | ||
( To record payment of cash dividend) |
(Table 2)
- Dividend payable is a liability and there is a decrease in the value of liability. Hence, debit the dividend payable by $12,000.
- Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash $12,000.
Prepare journal entry to record the declaration and issuance of small stock dividend:
Date | Account Titles and explanation | Debit ($) | Credit ($) |
Retained earnings | 21,600 | ||
Common stock to be distributed | 6,000 | ||
Additional paid-in capital from stock dividend | 15,600 | ||
( To record declaration of stock dividend) |
(Table 3)
- Retained earnings are a component of stockholders equity and there is a decrease in the value of the retained earnings. Hence, debit the retained earnings by $21,600.
- Common stock to be distributed is a component of stockholders equity and there is an increase in the value of the equity. Hence, debit the common stock to be distributed by $6,000.
- Additional paid-in capital from stock dividend is a component of stockholders equity and there is an increase in the value of the equity. Hence, debit the additional paid-in capital from stock dividend by $15,600.
Date | Account Titles and explanation | Debit ($) | Credit ($) |
Common stock to be distributed | 6,000 | ||
Common stock, $10 par | 6,000 | ||
( To record the issuance of common stock) |
(Table 4)
- Common stock to be distributed is a component of stockholders equity and there is an increase in the value of the equity. Hence, debit the common stock to be distributed by $6,000.
- Common stock, $10 par is a component of stockholders equity and there is a decrease in the value of the equity. Hence, credit the common stock at $10 par by $6,000.
Prepare journal entry to record the 500 shares that are being recalled and retired:
Date | Account Titles and explanation | Debit ($) | Credit ($) |
50,000 | |||
Additional paid-in capital on preferred stock | 5,000 | ||
Retained earnings | 7,500 | ||
Cash | 62,500 | ||
( To record 500 shares that were recalled and retired) |
(Table 5)
- Preferred stock is a component of stockholders equity and there is a decrease in the value of the equity. Hence, debit the preferred stock by $50,000.
- Additional paid-in capital on preferred stock is a component of stockholders equity and there is an increase in the value of the equity. Hence, credit the additional paid-in capital for preferred stock by $5,000.
- Retained earnings are a component of stockholders equity and there is an increase in the value of the retained earnings. Hence, credit the retained earnings by $7,500.
- Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash $62,500.
Prepare the correcting entry to record the depreciation expense:
Date | Account Titles and explanation | Debit ($) | Credit ($) |
Accumulated depreciation | 25,000 | ||
Retained earnings | 25,000 | ||
( To correct the depreciation expense that is recorded in the financial reporting and income tax reporting) |
(Table 6)
- Accumulated depreciation is a contra asset and it has increased. Hence, debit the accumulated depreciation by $25,000.
- Retained earnings are a component of stockholders equity and there is an increase in the value of the retained earnings. Hence, credit the retained earnings by $25,000.
Date | Account Titles and explanation | Debit ($) | Credit ($) |
Retained earnings | 7,500 | ||
Income tax payable on prior earnings | 7,500 | ||
( To record payment on income tax that were earned earlier) |
(Table 7)
- Retained earnings are a component of stockholders equity and there is a decrease in the value of the retained earnings. Hence, debit the retained earnings by 7,500.
- Income tax payable is a liability and there is an increase in the value of liability. Hence, credit the income tax payable by $7,500.
2.
Compute the Company K’s statement of retained earnings for the year ended December 31, 2016.
2.
Explanation of Solution
Compute the Company K’s statement of retained earnings for the year ended December 31, 2016.
Company K | ||
statement of retained earnings | ||
For the year ended December 31,2016 | ||
Particulars | Amount in $ | Amount in $ |
Retained earnings, as previously reported, January 1, 2016 | 218,600 | |
Add: Correction of overstatement in 2015 Expense ( net of $7,500 income taxes) | 17,500 | |
Adjusted retained earnings, January 1, 2016 | 236,100 | |
Add: Net income | 67,000 | |
303,100 | ||
Less: Cash dividends ($3 per share) | 12,000 | |
Stock dividends ($36 current market price on 600 common shares) | 21,600 | |
Reduction due to retirement of 500 shares of preferred Stock at a $125 call price in excess of the $110 original issuance | 7,500 | ($41,100) |
Retained earnings, December 31, 2016 | 262,000 |
(Table 8)
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Chapter 16 Solutions
Intermediate Accounting: Reporting and Analysis (Looseleaf)
- On January 1, 2019, Kittson Company had a retained earnings balance of 218,600. It is subject to a 30% corporate income tax rate. During 2019, Kittson earned net income of 67,000, and the following events occurred: 1. Cash dividends of 3 per share on 4,000 shares of common stock were declared and paid. 2. A small stock dividend was declared and issued. The dividend consisted of 600 shares of 10 par common stock. On the date of declaration, the market price of the companys common stock was 36 per share. 3. The company recalled and retired 500 shares of 100 par preferred stock. The call price was 125 per share; the stock had originally been issued for 110 per share. 4. The company discovered that it had erroneously recorded depreciation expense of 45,000 in 2018 for both financial reporting and income tax reporting. The correct depreciation for 2018 should have been 20,000. This is considered a material error. Required: 1. Prepare journal entries to record Items 1 through 4. 2. Prepare Kittsons statement of retained earnings for the year ended December 31, 2019.arrow_forwardSelected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2016, were as follows: a. Issued 15,000 shares of 0 par common stock at 0, receiving cash. b. Issued 4,000 shares of 80 par preferred 5% stock at 100, receiving cash. c. Issued 500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of 0.50 per share on common stock and 1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at 40 per share, plus a 150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at 33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for 24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 375. The bonds are classified as a held- to-maturitv long-term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0.60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 545, including commission. p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method, q. Accrued interest for three months on the Dream Inc. bonds purchased in (1). r. Pinkberry Co. recorded total earnings of 240,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39.02 per share on December 31, 2016. The investment is adjusted to fair value, using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero. Instructions Journalize the selected transactions. After all of the transactions for the year ended December 31, 2016, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step income statement for the year ended December 31, 2016, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. (Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 2016. c. Prepare a balance sheet in report form as of December 31, 2016. Income statement data: Advertising expense 150,000 Cost of merchandise sold 3,700,000 Delivery expense 30,000 Depreciation expense -office buildings and equipment 30,000 Depreciation expensestore buildings and equipment 100,000 Dividend revenue 4,500 Gain on sale of investment 4,980 Income from Pinkberry Co. investment 76,800 Income tax expense 140,500 Interest expense 21,000 Interest revenue 2,720 Miscellaneous administrative expense 7.500 Miscellaneous selling expense 14,000 Office rent expense 50,000 Office salaries expense 170,000 Office supplies expense 10,000 Sales 5,254,000 Sales commissions 185,000 Sales salaries expense 385,000 Store supplies expense 21,000 Retained earnings and balance sheet data: Accounts payable 194,300 Accounts receivable 545,000 Accumulated depreciationoffice buildings and equipment 1,580,000 Accumulated depreciationstore buildings and equipment 4,126,000 Allowance for doubtful accounts 8,450 Available for sale investments (at cost) 260,130 Bonds payable. 5%. due 2024 500,000 Cash 246,000 Common stock, 20 par (400,000 shares authorized; 100,000 shares issued. 94,600 outstanding) 2,000,000 Dividends: Cash dividends for common stock 155,120 Cash dividends for preferred stock 100,000 Goodwill 500,000 Income tax payable 44,000 Interest receivable 1,125 Investment in Pinkberry Co. stock (equity method) 1,009,300 Investment in Dream Inc. bonds (long term) 90,000 Merchandise inventory [December 31, 2016). at lower of cost (FIFO) or market 778,000 Office buildings and equipment 4.320,000 Paid-in capital from sale of treasury stock 13,000 Excess of issue price over parcommon stock 886,800 Excess of issue price over parpreferred stock 150,000 Preferred 5% stock. 80 par (30,000 shares authorized; 20,000 shares issued] 1,600,000 Premium on bonds payable 19,000 Prepaid expenses 27,400 Retained earnings, January 1, 2016 9,319,725 Store buildings and equipment 12,560,000 Treasury stock (5,400 shares of common stock at cost of 33 per share) 178,200 Unrealized gain (loss) on available for sale investments (6,500) Valuation allowance for available for sale investments (6,500)arrow_forwardSelected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2016, were as follows: a. Issued 15,000 shares of 20 par common stock at 30, receiving cash. b. Issued 4,000 shares of 80 par preferred 5% stock at 100, receiving cash. c. Issued 500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of 0.50 per share on common stock and 1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at 40 per share, plus a 150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at 33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for 24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 375. The bonds are classified as a heldtomaturity long-term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0.60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 45, including commission. p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method. q. Accrued interest for three months on the Dream Inc. bonds purchased in (l). r. Pinkberry Co. recorded total earnings of 240,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39.02 per share on December 31, 2016. The investment is adjusted to fair value, using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero. Instructions 1. Journalize the selected transactions. 2. After all of the transactions for the year ended December 31, 2016, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step income statement for the year ended December 31, 2016, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. (Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 2016. c. Prepare a balance sheet in report form as of December 31, 2016.arrow_forward
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- Chen Corporation began 2012 with the following stockholders equity balances: The following selected transactions and events occurred during the year: a. Issued 10,000 shares of common stock for 60,000. b. Purchased 1,200 shares of treasury stock for 4,800. c. Sold 2,000 shares of treasury stock for 11,000. d. Generated net income of 94,000. e. Declared and paid the full years dividend on preferred stock and a dividend of 1.00 per share on common stock outstanding at the end of the year. Chen Corporation maintains several paid-in capital accounts (Paid-in Capital in Excess of Par, Paid-in Capital from Treasury Stock, etc.) in its ledger, but combines them all as Additional paid-in capital when preparing financial statements. Open the file STOCKEQ from the website for this book at cengagebrain.com. Enter the formulas in the appropriate cells on the worksheet. Then fill in the columns to show the effect of each of the selected transactions and events listed earlier. Enter your name in cell A1. Save the completed worksheet as STOCKEQ2. Print the worksheet. Also print your formulas. Check figure: Total stockholders equity balance at 12/31/12 (cell G21). 398,800.arrow_forwardChen Corporation began 2012 with the following stockholders equity balances: The following selected transactions and events occurred during the year: a. Issued 10,000 shares of common stock for 60,000. b. Purchased 1,200 shares of treasury stock for 4,800. c. Sold 2,000 shares of treasury stock for 11,000. d. Generated net income of 94,000. e. Declared and paid the full years dividend on preferred stock and a dividend of 1.00 per share on common stock outstanding at the end of the year. Chen Corporation maintains several paid-in capital accounts (Paid-in Capital in Excess of Par, Paid-in Capital from Treasury Stock, etc.) in its ledger, but combines them all as Additional paid-in capital when preparing financial statements. In the space provided below, prepare the stockholders equity section of Chen Corporations balance sheet as of December 31, 2012. Use proper headings and provide full disclosure of all appropriate information. Chens corporate charter authorizes the issuance of 1,000 shares of preferred stock and 100,000 shares of common stock.arrow_forwardChen Corporation began 2012 with the following stockholders equity balances: The following selected transactions and events occurred during the year: a. Issued 10,000 shares of common stock for 60,000. b. Purchased 1,200 shares of treasury stock for 4,800. c. Sold 2,000 shares of treasury stock for 11,000. d. Generated net income of 94,000. e. Declared and paid the full years dividend on preferred stock and a dividend of 1.00 per share on common stock outstanding at the end of the year. Chen Corporation maintains several paid-in capital accounts (Paid-in Capital in Excess of Par, Paid-in Capital from Treasury Stock, etc.) in its ledger, but combines them all as Additional paid-in capital when preparing financial statements.arrow_forward
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