Question

2. The post-closing trial balance of Harmon Corporation as of December 31, 2020, contains the following stockholders' equity accounts. $ Preferred Stock (15,000 shares issued) Common Stock (250,000 shares issued) Paid-in Capital in Excess of Par-Preferred Stock Paid-in Capital in Excess of Par-Common Stock Common Stock Dividends Distributable Retained Earnings 750,000 2,500,000 250,000 400,000 250,000 ??? The following items were revealed during a review of the accounting records. a. No errors were made during the recording of 2020 transactions of in preparing the closing entry for net income. b. Preferred stock is $50 par value, 6% and is cumulative. 15,000 shares have been outstanding since January 1, 2018 C. Authorized stock is 20,000 shares of preferred, 500,000 share of common with a $10 par value. d. The January 1 balance in Retained Earnings was $1,170,000. e. On July 1, 20,000 shares of common stock were issued for cash at $16 per share. f. On September 1, the company discovered an understatement error of $90,000 in computing depreciation in 2014. The net of tax effect of $63,000 was properly debited directly to Retained Earnings. 8. A cash dividend of $250,000 was declared and properly allocated to preferred and common stock on October 1. No dividends were paid to preferred stockholders in 2019. h. On December 31, a 10% common stock dividend was declared out of retained earnings on common stock when the market price per share was $16. Net income for the year was $585,000. j. On December 31, 2020, the directors authorized disclosure of a $200,000 restriction of retained earnings for plant expansion. Instructions a. Reproduce the Retained Earnings account in T-account form for 2020. b. Prepare a retained earnings statement for 2020. C. Prepare the stockholders' equity section of the balance sheet at December 31, 2020. d. Compute the allocation of the cash dividend to preferred and common stock. (Show your work!)

Answer 1

a.

Retained Earnings
Sep. 1 Prior period adj.	63000	Jan. 1 Bal.	1170000
Oct. 31 Cash dividends	250000	Dec. 31 Net income	585000
Dec. 31 Stock dividend	400000
		Dec. 31 Bal.	1042000

Stock dividend = 10% x 250000 x $16 = $400000

b.

HARMON CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2020
Retained earnings, January 1, 2020		1170000
Less: Prior period adjustment		63000
Adjusted balance, January 1, 2020		1107000
Add: Net income		585000
		1692000
Less:
Cash dividend	250000
Stock dividend	400000	650000
Retained earnings, December 31, 2020		1042000

c.

HARMON CORPORATION
Partial Balance Sheet
December 31, 2020
Stockholders' Equity
Paid-in capital
Capital stock
6% Preferred stock		750000
Common stock	2500000
Common stock dividends distributable	250000
		2750000
Total capital stock		3500000
Additional paid-in capital
Preferred stock	250000
Common stock	400000
Total additional paid-in capital		650000
Total paid-in capital		4150000
Retained earnings		1042000
Total stockholders' equity		5192000

d. Allocation of the cash dividend to preferred stock: $90000

Allocation of the cash dividend to common stock: $160000

Working:

Preferred dividend in arrears = $50 x 6% x 15000 = $45000

Current year preferred dividend = $50 x 6% x 15000 = $45000

Total preferred dividend = $90000

Common dividend = $250000 - $90000 = $160000