Question

Kohler Corporation reports the following components of stockholders’ equity on December 31, 2015:

Common stock—$20 par value, 100,000 shares authorized, 45,000 shares issued and    outstanding	$	900,000
Paid-in capital in excess of par value, common stock		70,000
Retained earnings		370,000
Total stockholders’ equity	$	1,340,000

In year 2016, the following transactions affected its stockholders’ equity accounts.
Jan.	1		Purchased 4,500 shares of its own stock at $20 cash per share.
Jan.	5		Directors declared a $4 per share cash dividend payable on Feb. 28 to the Feb. 5 stockholders of record.
Feb.	28		Paid the dividend declared on January 5.
July	6		Sold 1,688 of its treasury shares at $24 cash per share.
Aug.	22		Sold 2,812 of its treasury shares at $17 cash per share.
Sept.	5		Directors declared a $4 per share cash dividend payable on October 28 to the September 25 stockholders of record.
Oct.	28		Paid the dividend declared on September 5.
Dec.	31		Closed the $368,000 credit balance (from net income) in the Income Summary account to Retained Earnings.

Prepare a statement of retained earnings for the year ended December 31, 2016. (Amounts to be deducted should be indicated by a minus sign.)

	KOHLER CORPORATION Statement of Retained Earnings For Year Ended December 31, 2016 Retained earnings, Dec. 31, 2015 $370,000 Add: Net income 368,000 738,000 Less: Cash dividends declared Less: Treasury stock reissuances Retained earnings, Dec. 31, 2016 $738,000

Answer 1

Solution:

KOHLER CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2016
	$$
Retained earnings, Dec. 31, 2015	$370,000
Add: Net income	368,000
	738,000
Less: Cash dividends declared (Refer Note 1)	($342,000)
Less: Treasury stock reissuance (July.6) (Refer NOte2)	($1,684)
Retained earnings, Dec. 31, 2016	$1,132,316

Note 1 - Cash Dividend Declared
Jan.5 Dividend Declared @ $4 each share (40,500 shares*4)	$162,000
Outstanding Shares = 45000 Issued - 4500 Treasury = 40,500 Shares
Sept.5 Dividend Declared (45,000 Shares x $4)	$180,000
(Outstanding Shares 40,500 Shares + Issued Treasury 1688+2812 = 45,000 Shares)
Total Dividend Declared and paid	$342,000

Note 2 –

Treasury Stock

Treasury Stock is the shares that a company repurchased from the market or from its shareholders.

Under cost method, the cost of shares purchased is debited to Treasury Stock Account.

On sale of treasury stock

(i) If selling price is higher than cost

- the relevant COST of treasury stock share is credited to Treasury Stock Account and Cash is debited with the total selling price and the difference is credited to Paid In Capital from treasury stock.

(ii) If selling price is lower than cost

Debit: Cash (with the selling price)

Debit: Retained Earnings (Difference between selling price and cost)

Credit: Treasury Stock (with the cost of share)

(iii) On retirement of Treasury Stock

Debit: Common Stock

Debit: Additional Paid In Capital – Treasury Stock

Debit: Retained Earnings

Credit: Treasury Stock

Note 2 -- Treasury Stock related Journal Entries

Date	General Journal	Debit	Credit
Jan.1	Treasury Stock (4,500 Shares x 20)	$90,000
	Cash		$90,000
July.6	Cash (1688 Shares x 24)	$40,512
	Treasury Stock (Cost 1688*20)		$33,760
	Paid in Capital From Treasury Stock (Bal fig)		$6,752
Aug..22	Cash (2812 shares * $17)	$47,804
	Paid in Capital from Treasury Stock	$6,752
	Retained Earnings (Bal fig)	$1,684
	Treasury Stock (2812 Shares x Cost $20)		$56,240

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