Chapter 18, Problem 18.23E

Transact ions affecting retained earnings

• LO18–6 through LO18–8

The balance sheet of Consolidated Paper, Inc., included the following shareholders’ equity accounts at December 31, 2017:

Paid-in capital:
Preferred stock, 8.8%, 90,000 shares at $1 par	$ 90,000
Common stock, 364,000 shares at $1 par	364,000
Paid-in capital—excess of par, preferred	1,437,000
Paid-in capital—excess of par, common	2,574,000
Retained earnings	9,735,000
Treasury stock, at cost; 4,000 common shares	(44,000)
Total shareholders’ equity	$14,156,000

During 2018, several events and transactions affected the retained earnings of Consolidated Paper.

Required:

1. Prepare the appropriate entries for these events:

a. On March 3, the board of directors declared a property dividend of 240,000 shares of Leasco International common stock that Consolidated Paper had purchased in January as an investment (book value: $700,000). The investment shares had a fair value of $3 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 2% 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 8.8% cash dividend on the 90,000 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, 2018. Net income for the year was $810,000.

To determine

Retained earnings:

Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

To journalize: The events and transactions that affected the retained earnings.

Explanation of Solution

(a)

Journalize the transactions related to property dividend.

On the declaration date:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
March	3	Investment in International L Stock		20,000
		Gain on Appreciation of Investment			20,000
		(To record gain on appreciated value of the investment)
March	3	Retained Earnings		720,000
		Property Dividends Payable			720,000
		(To record the declaration of dividends)

Table (1)

Working Notes:

Compute the gain (loss) on investment.

$\begin{array}{c}\text{Gain (loss) on investment = Fair value–Book value}\\ \text{=}\left(\begin{array}{l}\text{Number of shares }\times \\ \text{Fair value per share}\end{array}\right)\text{–\$700,000}\\ \text{=}\left(\text{240,000 shares }\times \text{\$3}\right)\text{– \$700,000}\\ \text{=\$20,000}\end{array}$

Compute the fair value of property dividends.

$\begin{array}{c}\text{Fair value of investment = }\left(\begin{array}{l}\text{Number of shares }\times \\ \text{Fair value per share}\end{array}\right)\\ \text{=240,000 shares }\times \text{\$3}\\ \text{=\$720,000}\end{array}$

On the record date:

Do not record any entry for the transaction occurred on date of record for the following reasons:

• The dividends will not be paid for those who buy the stock after the date of record.
• The company does not record any transactions on the date of record.
• The ownership of shares alone is verified.

On the date of payment:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
March	31	Property Dividends Payable		720,000
		Investment in Company G Stock			720,000
		(To record payment of property dividends)

Table (2)

Property dividend: Distribution of non-cash assets in the form of dividend is referred to as property dividend.

(b)

Journalize the stock split that effected in the form of a 25% stock dividend.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
May	3	Paid-In Capital–Excess of Par, Common		90,000
		Common Stock			90,000
		(To record stock split)

Table (3)

Note: Alternatively retained earnings can be debited instead of paid in capital-excess of par, common.

Working Notes:

Compute the stock split value that effected in the form of stock dividend.

$\begin{array}{c}\begin{array}{l}\text{Stock split value}\\ \text{that effected in the}\\ \text{form of stock diviend}\end{array}\}\text{=}\left(\begin{array}{l}\left(\begin{array}{l}\text{Number of common shares – }\\ \text{Number of treasury shares}\end{array}\right)\text{×}\\ \text{Stock dividend percentage×}\\ \text{Par value per share}\end{array}\right)\\ \text{=}\left(\text{364,000 shares–4,000 shares}\right)\text{ × 25\% × \$1}\\ \text{= \$90,000}\end{array}$

(c)

Journalize the declaration and distribution of 2% common stock dividend.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
July	5	Retained Earnings		99,000
		Common Stock			9,000
		Paid-in Capital in Excess of Par, Common			90,000
		(To record distribution of stock dividend)

Table (4)

Declaration of common stock dividend decreases retained earnings, increases common stock by the par value and increases paid in capital in excess of par by the excess of market value per share over the par value per share.

Working Notes:

Compute stock dividends amount.

$\begin{array}{c}\text{Stock dividends shares = }\left(\begin{array}{l}\text{Number of shares outstanding }+\\ \text{Number of shares issued as }\\ \text{stock dividend in event (b)}\end{array}\right)\times 2\%\text{ stock dividend}\\ \text{= }\left(\text{360,000 shares+90,000 shares}\right)\text{ × }\frac{2}{\text{100}}\\ \text{= 9,000 shares}\end{array}$ (1)

$\begin{array}{c}\text{Common stock dividends = }\left\{\begin{array}{l}\text{Stock dividend shares }\times \\ \text{Market value per share}\end{array}\right\}\\ \text{= 9,000 shares × \$11}\\ \text{= \$99,000}\end{array}$

Note: Refer to Equation (1) for value and computation of stock dividend shares.

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Stock dividend shares}\times \\ \text{Par value of stock}\end{array}\right\}\\ \text{= 9,000shares× \$1}\\ \text{= \$9,000}\end{array}$

Note: Refer to Equation (1) for value and computation of stock dividend shares.

Compute excess of par value of shares.

$\begin{array}{c}\text{Excess of par value = Market price –Par value}\\ \text{=\$11–\$1}\\ \text{=\$10}\end{array}$ (2)

Compute paid-in capital in excess value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital }\\ \text{in excess value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Stock dividend shares}\times \\ \text{Excess of par value}\end{array}\right)\\ \text{= 9,000 shares×\$10}\\ \text{= \$90,000}\end{array}$

Note: Refer to Equations (1) and (2) for value and computation of stock dividend shares and excess of par value of share.

(d)

Journalize the declaration and settlement of cash dividend on 90,000 preferred shares.

On the date of declaration:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
December	1	Retained Earnings		7,920
		Cash Dividends Payable			7,920
		(To record declaration of cash dividends)

Table (5)

Working Notes:

Compute the amount of dividends payable.

$\begin{array}{c}\text{Dividend payable = Number of shares}\times \text{Dividend percentage}\\ \text{= 90,000 shares}\times 8.8\%\\ \text{= \$7,920}\end{array}$

On the date of record of cash dividend:

Do not record any entry for the transaction occurred on date of record.

On the date of payment:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
December	28	Cash Dividends Payable		7,920
		Cash			7,920
		(To record payment of cash dividends)

Table (6)

(e)

Journalize the declaration and settlement of cash dividend of $0.50 per share on common shares.

On the date of declaration:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
December	1	Retained Earnings		229,500
		Cash Dividends Payable			229,500
		(To record declaration of cash dividends)

Table (7)

Working Notes:

Compute the amount of dividends payable.

$\begin{array}{c}\text{Dividends payable = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Dividend per share}\end{array}\right\}\\ \text{= }\left(\text{360,000 shares+90,000 shares+9,000 shares}\right)\text{ × \$0}\text{.50}\\ \text{= \$229,500}\end{array}$

On the date of record of cash dividend:

Do not record any entry for the transaction occurred on date of record.

On the date of payment:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
December	28	Cash Dividends Payable		229,500
		Cash			229,500
		(To record payment of cash dividends)

Table (8)

To determine

Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.

To Prepare: Stockholders’ equity sections of balance sheet for Incorporation CP as at December 31, 2018.

Explanation of Solution

Prepare stockholders’ equity sections of balance sheet for Incorporation CP as at December 31, 2018 as follows:

Incorporation CP
Stockholders’ Equity Section
December 31, 2018
Paid-in Capital	Amount ($)
Preferred stock, 8.8%, 90,000 shares at $1 par	90,000
Common stock, 463,000 shares at $1 par	463,000
Paid-in capital – excess of par, preferred	1,437,000
Paid-in capital – excess of par, common	2,574,000
Total paid-in capital	4,564,000
Retained earnings	9,488,580
Total paid-in capital and retained earnings	14,052,580
Less: Treasury stock, at cost, 4,000 shares	(44,000)
Total stockholders’ equity	$14,008,580

Table (9)

Working Notes:

Compute number of shares issued as on December 31, 2018.

Particulars	Number of Shares
Number of shares on December 31, 2017	364,000
Number of stock dividend shares issued  on May 3, 2018	90,000
Number of stock dividend shares issued  on July 5, 2018	9,000
Number of shares on December 31, 2018	463,000

Table (10)

Compute paid-in-capital excess of par value.

Particulars	Amount ($)
Balance on December 31, 2017	2,574,000
Paid-in-capital excess of par due to transaction on May 3	(90,000)
Paid-in-capital excess of par due to transaction on July 5	90,000
Balance on December 31, 2018	$2,574,000

Table (11)

Compute retained earnings value.

Particulars	Amount ($)
Balance on December 31, 2017	9,735,000
Retained earnings value due to transaction on March 3	(720,000)
Retained earnings value due to transaction on July 5	(99,000)
Retained earnings value due to transaction on December 1	(7,920)
Retained earnings value due to transaction on December 1	(229,500)
Net income in 2018	810,000
Balance on December 31, 2018	$9,488,580

Table (12)