Chapter 16, Problem 16P

1.

To determine

Prepare necessary journal entry to record the given transaction.

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 necessary journal entry to record the given transaction.

Date	Account Titles and explanation	Debit ($)	Credit ($)
January	Preferred stock , 8%, $100 par	100,000
	Additional paid-in capital on preferred         stock $\left(1,000\times \$5\left[\$105-\$100\right]\right)$	5,000
	Retained earnings     $\left(500\times \$15\left[\$125-\$110\right]\right)$	11,000
	Cash $\left(1,000\times \$116\right)$		116,000
	( To record 1,000 shares that were recalled and retired)
April	Retained earnings $\left[22,000\text{ shares }\times \text{ 10\%}\times \text{\$16}\right]$	35,200
	Common stock to be distributed      $\left[2,200\text{ shares}\times \text{\$10}\right]$		22,000
	Additional paid-in capital on common      stock		13,200
	(To record the declaration and issuance of stock dividend on common stock)
	Common stock to be distributed	22,000
	Common stock, $10 par		22,000
	(To record the issuance of common stock)
November	Treasury stock $\left[\text{1,000 shares}\times \text{\$18}\right]$	18,000
	Cash		18,000
	(To record the treasury stock 1,000 shares on common being reacquired for $18)
December	Retained earnings	10,500
	Dividend payable: preferred stock      $\left[\text{1,500 shares}\times 7\%\times \text{\$,100}\right]$		10,500
	(To record the declaration of annual cash dividend on preferred stock)
December	Retained earnings	23,200
	Dividend payable: common stock (1)		23,200
	(To record the declaration of annual cash dividend on common stock)
	Dividends payable: Preferred stock	10,500
	Cash		10,500
	(To record the payment of cash dividend on preferred stock)
	Dividends payable: Common stock	23,200
	Cash		23,200
	(To record the payment of cash dividend on common stock)
	Income summary	87,000
	Retained earnings		87,000
	(To record the transfer of  net income from income summary to retained earnings)
	Retained earnings	10,000
	Accumulated depreciation		10,000
	(To record the depreciation expense of $10,000 omitted)
	Income tax payable	3,000
	Retained earnings  $\left(\$10,000\times 30\%\right)$		3,000
	( To record interest payable)
	Accumulated depreciation	8,000
	Retained earnings		8,000
	( To record the understatement made on both accumulated depreciation and gain recognized on sale by $8,000 )
	Retained earnings	2,400
	Income tax payable $\left(\$8,000\times 30\%\right)$		2,400
	( To record payment on income tax that  were earned earlier)

(Table 1)

Working note (1): Calculate the amount of dividend payable to the common stock:

$\begin{array}{c}\begin{array}{l}\text{Amount of dividend payable }\\ \text{to the common stock}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Number of common stock }\\ -\text{Treasury stock dividend }\\ \text{available+Number of shares in }\\ \text{the stock dividend}\end{array}\right)\times \text{Dividend per share}\\ \text{=}\left(22,000-1,000+2,200\right)\times \$1\\ =\$23,200\end{array}$

2.

To determine

Prepare the statement of retained earnings for the Company C for the year ended December 31, 2019 and also provide necessary notes to its financial statement for the year ended December 31, 2019.

Explanation of Solution

Prepare the statement of retained earnings for the Company C for the year ended December 31, 2019:

Company C
statement of  retained earnings
For the  year ended December 31,2019
Particulars	Amount in $	Amount in $
Retained earnings, as previously reported, January 1, 2019		182,200
Add: Correction of overstatement  in 2018 gain on sale of equipment ( net of  $2,400 income taxes)		5,600
Less: Correction of omission of 2018depreciation on certain machinery(net of $3,000 income tax credit)		(7,000)
Adjusted retained earnings, January 1, 2019		180,000
Add: Net income		87,000
		267,800
Less: Stock dividends ($16 current market price on 2,200 shares)	35,200
Cash dividend: preferred stock ($7 on 1,500 shares)	10,500
Cash dividend: common stock ($1 on 23,200 shares)	23,200
Reduction of retained earnings due to a retirement of          preferred stock at a call price higher than the original                   issue price (23,200 shares at $11 excess).	11,000	(79,900)
Retained earnings, December 31, 2019		187,900

(Table 2)

Notes to financial statements:

• Note A: the amount of retained earnings is limited with the $18,000, the cost related to the treasury stock of 1,000 shares on common stock is being held.