Question

Retained Earnings: Transactions and Statement

The stockholders’ equity of Elson Corporation at January 1 is shown below:

5 Percent preferred stock, $100 par value, 10,000 shares authorized;
6,000 shares issued and outstanding	$600,000
Common stock, $5 par value, 200,000 shares
authorized; 70,000 shares issued and outstanding	$350,000
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	$1,946,000

The following transactions, among others, occurred during the year:

Apr.	1	Declared a 100 percent stock dividend on all outstanding shares of common stock. The market value of the stock was $13 per share.
	15	Issued the stock dividend declared on April 1.
Dec.	7	Declared a 3 percent stock dividend on all outstanding shares of common stock. The market value of the stock was $16 per share.
	17	Issued the stock dividend declared on December 7.
	20	Declared the annual cash dividend on the preferred stock and a cash dividend of 70 cents per common share, payable on January 15 to common stockholders of record on December 31.

Required

a. Prepare journal entries to record the foregoing transactions.

General Journal
Date	Description	Debit	Credit
Apr.01		$Answer	$Answer
		Answer	Answer
	Declared stock dividend on common stock.
Apr.15		Answer	Answer
		Answer	Answer
	Issued common shares as common stock declared as a dividend.
Dec.07		Answer	Answer
		Answer	Answer
		Answer	Answer
	Declared a cash dividend on common stock outstanding.
Dec.17		Answer	Answer
		Answer	Answer
	Issued Shares of common stock declared as a dividend.
Dec.20		Answer	Answer
		Answer	Answer
		Answer	Answer
	Declared cash dividend on preferred and common stock.

b. Prepare a statement of retained earnings. Net income for the year is $255,000.

Do not use negative signs with your answers.

ELSON CORPORATION Statement of Retained Earnings For the Year Ended December 31
	Retained Earnings, January 1		$Answer
	Add:		Answer
			Answer
	Less:	$Answer
	Stock Dividends Declared	Answer	Answer
			$Answer

Answer 1

a) Journal Entries are shown as follows (Amount in $)

Date	Description	Debit	Credit
Apr. 01	Retained Earnings (70,000*$5 par)	350,000
	Stock Dividend distributable		350,000
	(Declared stock dividend on common stock)
Apr. 15	Stock Dividend distributable	350,000
	Common Stock		350,000
	(Issued common shares as common stock declared as a dividend)
Dec.07	Retained Earnings (140,000*3%)*$16	67,200
	Stock Dividend distributable (140,000*3%)*$5		21,000
	Paid-in capital in excess of par value-Common stock [(140,000*3%)*($16-$5)]		46,200
	(Declared a cash dividend on common stock outstanding)
Dec.17	Stock Dividend distributable	21,000
	Common Stock		21,000
	(Issued Shares of common stock declared as a dividend)
Dec.20	Retained Earnings	130,940
	Dividends Payable - Common Stock (144,200*$0.70)		100,940
	Dividends Payable - Preferred Stock ($600,000*5%)		30,000
	(Declared cash dividend on preferred and common stock)

Working Notes:- 1) Common Stock dividend of 70,000 shares distributed on April 15 will increase the common stock outstanding from 70,000 shares to 140,000 shares and stock dividend of 3% (i.e. 140,000 shares*3% = 4,200 shares) will further increase the outstanding shares by 4,200 to total shares of 144,200 (140,000+4,200). 2) Therefore the cash dividend on common stock will be for 144,200 shares at $0.70 per share of common stock. Hence total cash dividend for common stock will be $100,940. 3) The cash dividend on Preferred stock will be 5% on $600,000 (i.e. $600,000*5% = $30,000).
b) Statement of Retained Earnings is shown as follows:- ELSON CORPORATION Statement of Retained Earnings For the Year Ended December 31 (Amount in $) Retained Earnings, January 1 656,000 Add: Net Income for the year 255,000 Total Balance available 911,000 Less: Cash dividends declared (130,940) Stock Dividends Declared ($350,000+$67,200) (417,200) (548,140) Retained Earnings, December 31 362,860