On January 1, 2019, Kittson Company had a retained earnings balance of $218,600. It is subject to a 30% corporate income tax rate. During 2019, Kittson earned net income of $67,000, and the following events occurred:
1. | Cash dividends of $3 per share on 4,000 shares of common stock were declared and paid. |
2. | A small stock dividend was declared and issued. The dividend consisted of 600 shares of $10 par common stock. On the date of declaration, the market price of the company’s common stock was $36 per share. |
3. | The company recalled and retired 500 shares of $100 par preferred stock. The call price was $125 per share; the stock had originally been issued for $110 per share. |
4. | The company discovered that it had erroneously recorded depreciation expense of $45,000 in 2018 for both financial reporting and income tax reporting. The correct depreciation for 2018 should have been $20,000. This is considered a material error. |
Required:
1. | Prepare journal entries to record Items 1 through 4. |
2. | Prepare Kittson’s statement of retained earnings for the year ended December 31, 2019 |
CHART OF ACCOUNTSKittson CompanyGeneral Ledger
ASSETS | |
111 | Cash |
121 | Accounts Receivable |
141 | Inventory |
152 | Prepaid Insurance |
181 | Equipment |
189 | Accumulated Depreciation |
LIABILITIES | |
211 | Accounts Payable |
231 | Salaries Payable |
250 | Unearned Revenue |
261 | Income Taxes Payable on Prior Earnings |
271 | Dividends Payable |
EQUITY | |
305 | Preferred Stock |
311 | Common Stock |
315 | Common Stock to be Distributed |
321 | Additional Paid-in Capital on Preferred Stock |
324 | Additional Paid-in Capital from Stock Dividend |
331 | Retained Earnings |
REVENUE | |
411 | Sales Revenue |
EXPENSES | |
500 | Cost of Goods Sold |
511 | Insurance Expense |
512 | Utilities Expense |
521 | Salaries Expense |
532 | Bad Debt Expense |
540 | Interest Expense |
541 | Depreciation Expense |
559 | Miscellaneous Expenses |
910 | Income Tax Expense |
Amount Descriptions | |
Adjusted retained earnings, January 1, 2019 | |
Cash dividends | |
Correction of overstatement in 2018 depreciation expense, net | |
Net income | |
Reduction of retained earnings due to retirement of preferred stock | |
Retained earnings, as previously reported, January 1, 2019 | |
Retained earnings, December 31, 2019 | |
Stock dividend |
Transaction | Account Titles and explantion | Debit | Credit | |
1 | Retained Earnings | $12,000 | ||
Dividend Payable | $12,000 | |||
Dividend Payable | $12,000 | |||
Cash | $12,000 | |||
2 | Retained Earnings | $21,600 | (600 x $36) | |
Common Stock to be Distributed | $6,000 | (600 x $10) | ||
Additional Paid-in Capital from Stock Dividend | $15,600 | |||
Common Stock to be Distributed | $6,000 | |||
Common Stock | $6,000 | |||
3 | Preferred Stock | $50,000 | (500 x $100) | |
Additional Paid-in Capital on Preferred Stock | $5,000 | (500 x $10) | ||
Retained Earnings | $7,500 | Balance | ||
Cash | $62,500 | (500 x $125) | ||
4 | Accumulated Depreciation | $17,500 | ($25,000 x .70) | |
Retained Earnings | $17,500 | |||
On January 1, 2019, Kittson Company had a retained earnings balance of $218,600. It is subject...
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