Question

Prepare Statement of Earnings for year ended December 31, 2019

On October 31st, 2019, the company declared $30,000 cash dividends. The dividends were paid on February 12, 2020.

On February 15th, 2019, the company declared a 20% common stock dividends when market share price was $30. The shares were distributed on November 15th, 2019 when market share price was $32.

On December 31, 2019, the company declared a two-for-one stock split on common shares.

Client/Customer List was purchased on December 31, 2019. It is expected to have an economic life of 3 years.

The furniture was purchased on Jan 1, 2017. It has a useful life of 10 years, with no expected residual value. Company uses the straight-line depreciation method. No depreciation was recorded for year 2019.

Jolly Party Inc. TRIAL BALANCE 31-Dec-19 Account name Debit Credit 16,000 50,000 14,000 12,000 14,000 5,000 4,000 187,000 15,000 20,000 10,000 Accounts Payable Accounts Receivable Accumulated Depreciation - Furniture Accumulated Other Comprehensive Income Advertising Expense Allowance for Doubtful accounts Bad debt expense Cash Client List Common Shares (unlimited number of shares authorized, 1,000 issued) Contributed Surplus Depreciation Expense-Furniture Furniture Goodwill Income tax expense Income tax payable Note Payable (instalments of $10,000/year) Preferred Shares (non-cumulative $2,100,000 of shares authorized, 2,000 issued) Prepaid Rent Rent Expense Retained Earnings, beginning of year Salary Expense Service Revenue Unearned Service Revenue 70,000 40,000 30,000 10,000 20,000 35,000 9,000 35,500 80,000 109,000 332,500 9,000 Totals 563500 563500

Answer 1

Jolly Party Inc. Statement of Changes in Retained Earnings For the Year Ended December 31, 2019 Retained Earnings, Jan. 1, 2019 $80,000 Add: Net Income for the year $140,000 [Ref: Workings] Less: Cash dividends $30,000 Less: Stock dividends $6,000 [1,000 shares x 20% x $30] Net Increase in Retained Earnings $104,000 Retained Earnings, Dec. 31, 2019 $184,000 Note: Workings: While calculating amount of stock dividends, share price as at date of stock dividend shall be taken as share price. That is, Income Statement market price per share at the time of distributing the stock dividend shall not be taken into account as it is irrelevant. So, Service Revenue $332,500 amount of stock dividends is calculated on statement of both retained earnings and shareholders' equity. Expenses: Advertising Expense $14,000 When 2-for-1 stock split was done on December 31, 2019, 2 shares would have been issued for every 1 existing share. Bad Debt Expense $4,000 As the existing # of shares before stock split was 1,000 x 120% = 1,200 shares, there would be 1,200 x (2/1) = 2,400 issued Depreciation Expense-Furniture $0 after stock split. It will just increase the number of shares issued only but does not affect the amount of equity reported. Rent Expense $35,500 As a result, stock split will not appear on both statement of retained earnings and shareholders' equity for the period. Still, Salary Expense $109,000 it would be useful while calculating cash dividend per share or stock dividend after such stock split date. Income Tax Expense $30,000 Total Expenses $192,500 Net Income $140,000 [$332500 - $192500]