Question

The ledger of Smith Corporation at December 31, 2022, after the books have been closed, contains the following stockholders' equity accounts. Preferred Stock (10,000 shares issued) $1,000,000 Common Stock (300,000 shares issued) 1,500,000 Paid-in Capital in Excess of Par Value-Preferred Stock 200,000 Paid-in Capital in Excess of Stated Value-Common Stock 1,600,000 Retained Eamings 2,860,000 A review of the accounting records reveals this information: • 1. Preferred stock is 8%, $100 par value, noncumulative. Since January 1, 2021, 10,000 shares have been outstanding; 20,000 shares are authorized. 2. Common stock is no-par with a stated value of $5 per share; 600,000 shares are authorized • 3. The January 1, 2022, balance in Retained Earnings was $2,380,000. • 4. On October 1, 60,000 shares of common stock were sold for cash at $9 per share. . 5. A cash dividend of $400,000 was declared and properly allocated to preferred and common stock on November 1. No dividends were paid to preferred stockholders in 2021. 6. Net income for the year was $880,000. • 7. On December 31, 2022, the directors authorized disclosure of a $160,000 restriction of retained earnings for plant expansion. (Use Note A.) Instructions a. Reproduce the Retained Earnings account (T-account) for the year. b. Prepare the stockholders' equity section of the balance sheet at December 31.

Answer 1

a) The preferred shares are non cumulative, therefore no dividends would be paid to preferred stockholders for 2021.

Cash dividends paid to preferred stockholders = $1,000,000*8% = $80,000

Remaining dividends paid to common stockholders = $400,000 - $80,000 = $320,000

Retained Earnings T-Account is shown as follows:- (Amounts in $)

Preferred Dividends	80,000	Beginning Balance	2,380,000
Common Dividends	320,000	Net Income	880,000
Restriction for Plant Expansion	160,000
Ending Balance, Unrestricted	2,700,000

b) Increase in common stock Face Value due to new issue = 60,000 shares*$5 stated value

= $300,000

Increase in Common Stock Additional Paid in Capital = 60,000 shares*$4 = $240,000

The stockholders' equity section of the balance sheet is prepared as follows:-

Balance Sheet (Partial) (Amounts in $)

Stockholders' Equity
Preferred Stock (8%, $100 par value, 20,000 shares authorized and 10,000 outstanding)	1,000,000
Common Stock (No par, $5 stated value, 600,000 shares authorized and 360,000 issued) (360,000*$5)	1,800,000
Paid-in Capital in excess of Par Value-Preferred Stock	200,000
Paid in Capital in excess of Stated Value-Common Stock (1,600,000+240,000)	1,840,000
Total Paid-in Capital (A)	4,840,000
Retained Earnings, Unrestricted	2,700,000
Retained Earnings, restriction for plant expansion	160,000
Total Retained Earnings (B)	2,860,000
Total Stockholders' Equity (A+B)	7,700,000