Question

Identifying and Analyzing Financial Statement Effects of Dividends
The stockholders' equity of Kinney Company at December 31, 2011, is shown below.

5% preferred stock, $100 par value, 18,000 shares authorized; 8,000 shares issued and outstanding	$ 800,000
Common stock, $5 par value, 200,000 shares authorized; 50,000 shares issued and outstanding	250,000
Paid-in capital in excess of par value—preferred stock	40,000
Paid-in capital in excess of par value—common stock	300,000
Retained earnings	656,000
Total stockholders' equity	$2,046,000

The following transactions, among others, occurred during 2012:
Apr. 1 Declared and issued a 100% stock dividend on all outstanding shares of common stock. The market value of the stock was $11 per share.
Dec. 7 Declared and issued a 4% stock dividend on all outstanding shares of common stock. The market value of the stock was $14 per share.
Dec. 20 Declared and paid (1) the annual cash dividend on the preferred stock and (2) a cash dividend of 80 cents per common share.

(a) Use the financial statement effects template to indicate the effects of these separate transactions.

Use negative signs with answers, when appropriate.

	Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Apr. 1	Answer		Answer		Answer		Answer		Answer
Dec. 7	Answer		Answer		Answer		Answer		Answer
Dec. 20	Answer		Answer		Answer		Answer		Answer

Income Statement
Revenue	-	Expenses	=	Net Income
Answer		Answer		Answer
Answer		Answer		Answer
Answer		Answer		Answer

(b) Compute retained earnings for 2012 assuming that the company reports 2012 net income of $253,000.
$Answer

Answer 1

Answer:

(a)

Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Apr. 1							250,000		-250,000
Dec. 7							56,000		-56,000
Dec. 20	-123,200								-123,200

Income Statement
Revenue	-	Expenses	=	Net Income
0		0		0
0		0		0
0		0		0

(b)

Retained Earnings for 2012

479,800

Calculation:

(a)

Here we need to prepare the financial statement effects template to indicate the effects of the transactions provided separately.

Apr .1

Declared and issued a 100% stock dividend on all outstanding shares of common stock. Since 100% stock dividend is declared, we need to multiply the outstanding stock with %. And then we need to multiply it with the par value of $5.

So,

Stock dividend shares = 50,000 shares x 100%

Value of stock dividend = 50,000 x 5 = 250,000

We need to add this to Contributed Capital and also deduct this in Earned Capital.

Dec. 7

Declared and issued a 4% stock dividend on all outstanding shares of common stock. The market value of the stock was $14 per share. Here we need to take the 4% of Stock dividend shares issued and outstanding and then multiply it with the market value of $14.

Stock dividend shares = (50,000 + 50,000 shares) x 4% = 4,000

Value of stock dividend = 4,000 x 14= 56,000

We need to add this to Contributed Capital and also deduct this in Earned Capital.

Dec. 20

Declared and paid the annual cash dividend on the preferred stock and a cash dividend of 80 cents per common share. So here we need to total the Common shares outstanding and then multiply it with the .80 as it is 80 cents per common share. Then we need to find the Cash dividend to preferred stockholders by multiplying the preferred stock with 5%.

Number of Common shares outstanding = (50,000 + 50,000 shares) + 4000 shares = 104,000 shares

Cash dividend to Common stockholders = 104,000 shares x 0.80 = 83200

Cash dividend to preferred stockholders = 800000 x 5% = 40,000

So the total dividend = 83,200 + 40,000 = 123,200

Here we need to include this in cash and reduce in Earned Capital.

(b)

Here we need to compute retained earnings for 2012 assuming that the company reports 2012 net income of $253,000. So first we need to take the pening Retained Earnings Balance and then add the net income. Then we need to deduct the dividends calculated in (a).

Opening Retained Earnings Balance	656,000
Add Net Income During the year	253,000
Less 100% stock Dividends Declared	(250,000)
Less 4% stock Dividends Declared	(56,000)
Less cash dividend paid	(123,200)
Ending Retained Earnings Balance	479,800