
Concept explainers
1.
Journalize the given transaction.
1.

Explanation of Solution
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
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