Question

On January 1, 2019, Kittson Company had a retained earnings balance of $218,600. It is subject to a 30% corporate income tax rate. During 2019, Kittson earned net income of $67,000, and the following events occurred:

1.	Cash dividends of $3 per share on 4,000 shares of common stock were declared and paid.
2.	A small stock dividend was declared and issued. The dividend consisted of 600 shares of $10 par common stock. On the date of declaration, the market price of the company’s common stock was $36 per share.
3.	The company recalled and retired 500 shares of $100 par preferred stock. The call price was $125 per share; the stock had originally been issued for $110 per share.
4.	The company discovered that it had erroneously recorded depreciation expense of $45,000 in 2018 for both financial reporting and income tax reporting. The correct depreciation for 2018 should have been $20,000. This is considered a material error.

Required:

1.	Prepare journal entries to record Items 1 through 4.
2.	Prepare Kittson’s statement of retained earnings for the year ended December 31, 2019.

Answer 1

1. Journal entries

S. no.	Accounts and explanation	Debit	Credit
1.	Retained earnings	$12,000
	Cash dividends payable		$12,000
	(To record the declaration of a cash dividend of $ 12,000 ($3*4000 shares)
	Cash dividend payable	$12,000
	Credit cash		$12,000
	( To record the cash payment of a cash dividend of $12,000 )
2.	Retained earnings (600 shares* $36)	$21,600
	Common stock dividend distributable		$6,000
	Paid-in capital in excess of Par		$15,600
	( To record the declaration of small stock dividend)
	Common stock dividend distributable	$6,000
	Common stock		$6,000
	( To record the distribution of common stock)
3.	Preferred stock (at par) 500 shares* $100	$50,000
	Additional Paid in Capital in Excess of Par (Preferred stock)	$5,000
	Retained earnings	$7,500
	Cash (500shares*$125)		$62,500
	(To record the retirment of preferred stock)
4.	Revaluation surplus	$25,000
	Retained earnings		$25,000
	(to correct the material error of depreciation of 2018)

Explanation:

2. Kittson's statement of retained earnings for the year ended December 31, 2019

Statement of retained earnings equation is :

Retained earnings = Beginning balance of RE + Net income - Common stock dividend paid - Preffered stock dividend paid.

Kittson Company Retained earning for the year ending 31st Dec, 2019
Beginning balance   Retained earnings !st Jan 2019 Add Net income for FY 2019 Material error of depreciation Total "Less" Dividend dec and paid Common stock Retirement of preferred stock	$218,600 $67,000 $25,000 $12,000 $21,600 $7,500	$310,600 ($41,100)
Retained earnings at the end of 2019		$269,500