Question

Exercise 18-23 Transactions affecting retained earnings [LO18-6, 18-7, 18-8]

The balance sheet of Consolidated Paper, Inc., included the following shareholders’ equity accounts at December 31, 2015:

Paid-in capital:
Preferred stock, 7.5%, 98,000 shares at $1 par	$	98,000
Common stock, 484,800 shares at $1 par		484,800
Paid-in capital—excess of par, preferred		1,595,000
Paid-in capital—excess of par, common		2,645,000
Retained earnings		9,745,000
Treasury stock, at cost; 4,800 common shares		(52,800	)
Total shareholders' equity	$	14,515,000

During 2016, several events and transactions affected the retained earnings of Consolidated Paper.

Required:

1.	Prepare the appropriate entries for these events. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

a.	On March 3 the board of directors declared a property dividend of 290,000 shares of Leasco International common stock that Consolidated Paper had purchased in January as an investment (book value: $552,000). The investment shares had a fair value of $2 per share and were distributed March 31 to shareholders of record March 15.
b.	On May 3 a 5-for-4 stock split was declared and distributed. The stock split was effected in the form of a 25% stock dividend. The market value of the $1 par common stock was $11 per share.
c.	On July 5 a 1% common stock dividend was declared and distributed. The market value of the common stock was $11 per share.
d.	On December 1 the board of directors declared the 7.5% cash dividend on the 98,000 preferred shares, payable on December 28 to shareholders of record December 20.
e.	On December 1 the board of directors declared a cash dividend of $0.50 per share on its common shares, payable on December 28 to shareholders of record December 20.

      

2.	Prepare the shareholders' equity section of the balance sheet for Consolidated Paper, Inc. at December 31, 2016. Net income for the year was $880,000. (Negative amounts should be indicated by a minus sign.)

     

Answer 1

	Date	General Journal	Debit	Credit
a	March 3	Investment in Leasco International stock	28000
		Gain on appreciation of investment		28000
		(290000 * 2 - 552000)
		Retained earnings	580000
		Property dividends payable		580000
	March 15	No Entry
	March 31	Property dividends payable	580000
		Investment in Leasco International stock		580000
b	May 3	Paid-in capital—excess of par, common*	120000
		Common stock(25% x [484,800 –4,800] shares at $1 par)		120000
		*alternatively, retained earnings may be debited
c	July 5	Retained earnings	66000
		Common stock		6000
		Paid-in capital—excess of par, common (difference)		60000
		*1% x [480,000 + 120,000 shares] = 6,000 additional shares
d	December 1	Retained earnings (98,000 * 7.5%)	7350
		Cash dividends payable		7350
	December 20	No entry
	December 28	Cash dividends payable	7350
		Cash		7350
e	December 1	Retained earnings [(480000 + 66000) * 0.50]	273000
		Cash dividends payable		273000
	December 20	No Entry
	December 28	Cash dividends payable	273000
		Cash		273000

CONSOLIDATED PAPER, INC.
[Shareholders’ Equity section]
December 31, 2013
Paid-in capital:
Preferred stock, 7.5%, 98,000 shares at $1 par	98,000
Common stock, 463,000 shares at $1 par1	5,50,000
Paid-in capital - excess of par, preferred	15,95,000
Paid-in capital - excess of par, common2	26,45,000
Retained earnings3	9698650
Treasury stock, at cost; 4,800 common shares	-52,800
Total shareholders’ equity	9645850
1. 484,400 + 60,000 + 6,000 = 550,000 shares
2. 2,645,000 + 60,000 - 60,000 = 2,645,000
3. $9,745,000 -580,000 -66,000 -7,350 -273,000 + 880,000 = $9,488,580