Question

Shown below in T-account format are the changes affecting the retained earnings of Forge Corporation during 2018. At January 1, 2018, the corporation had outstanding 107 million common shares, $1 par per share.
  

Retained Earnings ($ in millions)
		92	Beginning balance
Retirement of 7 million common shares for $21 million	4
		81	Net income for the year
Declaration and payment of a $0.35 per share cash dividend	35
Declaration and distribution of a 4% stock dividend	24
		110	Ending balance

Required:
1. From the information provided by the account changes you should be able to recreate the transactions that affected Forge’s retained earnings during 2018. Prepare the journal entries that Forge must have recorded during the year for these transactions.
2. Prepare a statement of retained earnings for Forge for the year ended 2018.

Answer 1

Forge Corporation Requirement 1 ($ in millions) The $4 debit represents difference between the $21 million that was paid to retire the 7 million shares, and the combined par value of $1 per share and PIC in excess of par which will be a plug number. Debit in $ Credit in Journal Enteries Trans Particulars 1 Common stock (7 million x $1 par) a/c Dr Retained earnings (given) a/c Dr. PIC in excess of par (plug) a/c Dr. To Cash (given) 2 Dr. Income summary a/c To Retained earnings (given) Dr. Retained earnings (given) a/c To Cash 35 4 Retained earnings (given) a/c Dr. To Common stock [(4% x 100 million) < $1] TO PIC in excess of par (plug) The declaration of the 4% stock dividend would have been based on 100 million shares (107 million at the beginning of the year less the retirement of 7 million shares) Requirement 2 Statement of Retained Earnings For the year ended December 31, 2018 Balance, January 1 Add: Net Income Deduct: Retirement of common stock Cash dividends Stock dividend Balance, December 31 110