Chapter 16, Problem 3P

1.

To determine

Journalize 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 journal entry to record the payment of cash dividend:

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Retained earnings $\left(4,000\times \$3\right)$	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 $\left(600\times \$36\right)$	21,600
	Common stock to be distributed     $\left(600\times \$10\right)$		6,000
	Additional paid-in capital from stock      dividend $\left(600\times \$26\right)$		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 ($)	Credit ($)
	Preferred stock $100 par $\left(500\times \$100\right)$	50,000
	Additional paid-in capital on preferred      stock  $\left(500\times \$10\left[\$110-\$100\right]\right)$	5,000
	Retained earnings $\left(500\times \$15\left[\$125-\$110\right]\right)$	7,500
	Cash $\left(500\times \$125\right)$		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 $\left[\$45,000-\$20,000\right]$	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     $\left(\$25,000\times 30\%\right)$		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.

To determine

Compute the Company K’s statement of retained earnings for the year ended December 31, 2016.

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 depreciation          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)