Question

Rolt Company began 2019 with a $105,000 balance in retained earnings. During the year, the following events occurred:

1.   The company earned net income of $86,000.

2.   A material error in net income from a previous period was corrected. This error correction increased retained earnings by $9,590 after related income taxes of $4,110.

3.   Cash dividends totaling $12,000 and stock dividends totaling $18,500 were declared.

4.   One thousand shares of callable preferred stock that originally had been issued at $115 per share were recalled and retired at the beginning of 2019 for the call price of $125 per share.

5.   Treasury stock (common) was acquired at a cost of $19,000. State law requires a restriction of retained earnings in an equal amount. The company reports its retained earnings restrictions in a note to the financial statements.

Required:

Prepare a statement of retained earnings for the year ended December 31, 2019.

Answer 1

ROLT COMPANY Statement of retained earnings For the year ended December 31, 2019
Retained earnings, as previously reported, Jan 1, 2019		$105,000
Add: correction due to understatement of previous income		9,590
Adjusted Retained earnings, Jan 1, 2019		$114,590
Add: net income		86,000
		$200,590
Less: cash dividends	$12,000
Less: stock dividends	18,500
Less: reduction due to retirement of preferred stock	10,000	40,500
Retained earnings, December 31, 2019		$160,090

Reduction due to retirement of preferred stock = (Call price per share - issue price per share) x No. of  preferred stock

= ($125 per share - $115 per share) x 1000 shares

= $10,000