Chapter 21, Problem 11SPB

1.

To determine

Journalize the given transactions in the books of Company N.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the given transactions in the books of Company N.

Transaction on March 20:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
March	20	Cash Dividends			27,000
			Preferred Dividends Payable			9,000
			Common Dividends Payable			18,000
		(Record declaration of preferred  and common dividends)

Table (1)

Description:

• Cash Dividends is a contra-capital temporary account. This account decreases stockholders’ equity and is closed as the dividends are paid off. So, the account is debited.
• Preferred Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.
• Common Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute amount of preferred dividends declared.

$\begin{array}{c}\text{Dividend declared = Number of shares ×Dividend per share}\\ \text{= 12,000 shares ×\$0}\text{.75}\\ \text{= \$9,000}\end{array}$ (1)

Compute amount of common dividends declared.

$\begin{array}{c}\text{Dividend declared = Number of shares ×Dividend per share}\\ \text{= 90,000 shares ×\$0}\text{.20}\\ \text{= \$18,000}\end{array}$ (2)

Transaction on April 15:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
April	15	Preferred Dividends Payable			9,000
		Common Dividends Payable			18,000
			Cash			27,000
		(Record payment of dividends)

Table (2)

Description:

• Preferred Dividends Payable is a liability account. Since the liability to pay dividends has been paid off, liability decreased, and a decrease in liability is debited.
• Common Dividends Payable is a liability account. Since the liability to pay dividends has been paid off, liability decreased, and a decrease in liability is debited.
• Cash is an asset account. The amount is decreased because cash is paid as dividends, and a decrease in assets should be credited.

Note: Refer to Equations (1) and (2) for the value and computation preferred and common dividends.

Transaction on October 10:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
October	10	Cash Dividends			27,000
			Preferred Dividends Payable			9,000
			Common Dividends Payable			18,000
		(Record declaration of preferred  and common dividends)

Table (3)

Description:

• Cash Dividends is a contra-capital temporary account. This account decreases stockholders’ equity and is closed as the dividends are paid off. So, the account is debited.
• Preferred Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.
• Common Dividends Payable is a liability account. Since the liability to pay dividends increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute amount of preferred dividends declared.

$\begin{array}{c}\text{Dividend declared = Number of shares ×Dividend per share}\\ \text{= 12,000 shares ×\$0}\text{.75}\\ \text{= \$9,000}\end{array}$ (3)

Compute amount of common dividends declared.

$\begin{array}{c}\text{Dividend declared = Number of shares ×Dividend per share}\\ \text{= 90,000 shares ×\$0}\text{.20}\\ \text{= \$18,000}\end{array}$ (4)

Transaction on November 10:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
November	10	Preferred Dividends Payable			9,000
		Common Dividends Payable			18,000
			Cash			27,000
		(Record payment of dividends)

Table (4)

Description:

• Preferred Dividends Payable is a liability account. Since the liability to pay dividends has been paid off, liability decreased, and a decrease in liability is debited.
• Common Dividends Payable is a liability account. Since the liability to pay dividends has been paid off, liability decreased, and a decrease in liability is debited.
• Cash is an asset account. The amount is decreased because cash is paid as dividends, and a decrease in assets should be credited.

Note: Refer to Equations (3) and (4) for the value and computation preferred and common dividends.

Transaction on November 17:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
November	17	Stock Dividends			117,000
			Stock Dividends Distributable			18,000
			Paid-In Capital in Excess of Par–Common Stock			99,000
		(Record declaration of stock dividends)

Table (5)

Description:

• Stock Dividends is a contra-stockholders’ equity temporary account. This account decreases stockholders’ equity and is closed to Retained Earnings account as the common stock is issued. So, the account is debited.
• Stock Dividends Distributable is a stockholders’ equity account. Since common stock is declared to be issued as stock dividends, at par value, equity value is increased. An increase in equity is credited.
• Paid-In Capital in Excess of Par–Common Stock is a stockholders’ equity account. Since the stock is issued in excess of par value, equity value is increased. An increase in equity is credited.

Working Notes:

Compute the number of shares to be distributed as stock dividends.

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= 90,000 shares × 10\%}\\ \text{= 9,000 shares}\end{array}$ (5)

Compute amount of stock dividends (Refer to Equation (5) for stock dividend shares value).

$\begin{array}{c}\text{Stock dividends = Stock dividend shares }\times \text{ Market value per share}\\ \text{= 9,000 shares × \$13}\\ \text{= \$117,000}\end{array}$ (6)

Compute the amount of stock dividends distributable (Refer to Equation (5) for stock dividend shares value).

$\begin{array}{c}\begin{array}{l}\text{Stock dividends }\\ \text{distributable value}\end{array}\}\text{ = Stock dividend shares }\times \text{ Par value of stock}\\ \text{= 9,000 shares × \$2}\\ \text{= \$18,000}\end{array}$ (7)

Compute paid-in capital in excess of par-common stock (Refer to Equations (6) and (7) for stock dividends and stock dividends distributable value).

$\begin{array}{c}\text{Paid-in capital = Stock dividends –Stock dividends distributable value}\\ \text{= \$117,000 – \$18,000}\\ \text{= \$99,000}\end{array}$

Transaction on December 15:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
December	15	Stock Dividends Distributable			18,000
			Common Stock			18,000
		(Record issue of stock dividends in the form of common stock)

Table (6)

Description:

• Stock Dividends Distributable is a stockholders’ equity account. Since common stock is issued due to declaration of stock dividends, the value is transferred to common stock, the equity value is decreased. A decrease in equity is debited.
• Common Stock is a stockholders’ equity account. Since common stock is issued, equity value is increased. An increase in equity is credited.

Note: Refer to Equation (7) for value and computation of stock dividends distributable value.

Transaction on December 31:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20-2
December	31	Income Summary			260,000
			Retained Earnings			260,000
		(Record net income being closed to Retained Earnings account)

Table (7)

Description:

• Income Summary is a temporary account used to close the net balance of revenue and expense accounts. Since the net income is closed to Retained Earnings account, the Retained Earnings is credited and Income Summary account is debited.
• Retained Earnings is a stockholders’ equity account. Since revenues are transferred to the account, the value increased, and an increase in equity is credited.

Transaction on December 31:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20-2
December	31	Retained Earnings			171,000
			Cash Dividends			54,000
			Stock Dividends			117,000
		(Record dividends being closed to Retained Earnings account)

Table (8)

Description:

• Retained Earnings is a stockholders’ equity account. Since dividends are transferred to the account, the value decreased, and a decrease in equity is debited.
• Cash Dividends is a stockholders’ equity account. Since the cash dividends are closed to Retained Earnings, the account is reversed and credited.
• Stock Dividends is a stockholders’ equity account. Since the stock dividends are closed to Retained Earnings, the account is reversed and credited.

Note: The total cash dividends paid is $54,000$\left(\$27,000+\$27,000\right)$ on April 15 and November 10. Refer to Equation (6) for value and computation of stock dividends value.

2.

To determine

Post the entries that effect the retained earnings balance into the Retained Earnings T-account.

Explanation of Solution

Posting transactions: The process of transferring the journalized transactions into the accounts of the ledger is known as posting the transactions.

T-account: The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit, and the right hand side is known as credit.

Post the entries that effect the retained earnings balance into the Retained Earnings T-account.

Retained Earnings–Appropriated for Land Acquisition
		75,000	January 1
		$75,000	Balance

Table (9)

Retained Earnings–Unappropriated
		825,000	January 1
December 31	171,000	260,000	December 31
Total	171,000	1,085,000	Total
		$914,000	Balance

Table (10)

3.

To determine

Prepare a statement of retained earnings of Company N for the year ended December 31, 20--.

Explanation of Solution

Statement of retained earnings: This statement reports the beginning retained earnings and all the changes which led to ending retained earnings. Net income from income statement is added to and dividends is deducted from beginning retained earnings to arrive at the end result, ending retained earnings.

Prepare a statement of retained earnings of Company N for the year ended December 31, 20--.

Company N
Statement of Retained Earnings
For the Month Ended December 31, 20--
Appropriated:
Appropriated for land acquisition			$75,000
Unappropriated:
Unappropriated retained earnings, January 1		$825,000
Add: Net income for the year		260,000
		1,085,000
Less: Cash dividends	$(54,000)
Less: Stock dividends	(117,000)	(171,000)
Unappropriated retained earnings, December 31			914,000
Total retained earnings, December 31, 20--			$989,000

Table (11)

Conclusion

Hence, statement of retained earnings of Company N shows the ending total retained earnings of $989,000 for the year ended December 31, 20--.