Question

Prepare in proper form a Statement of Changes in Shareholders’ Equity for the 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.

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 Add: Net Income for the year $140,000 Less: Cash dividends -$30,000 Less: Stock dividends $6,000 Net Increase in Retained Earnings Retained Earnings, Dec. 31, 2019 $80,000 [Ref: Workings] Jolly Party Inc. Statement of Changes in Shareholders' Equity For the Year Ended December 31, 2019 Shareholders' Equity, Jan. 1, 2019 $110,000 ($20,000 + $10,000 + $80,000) Add: Net increase in retained earnings $104,000 (Ref: Stmnt of Ret. Earnings] Add: Increase in equity from stock dividends $6,000 (1,000 shares x 20% × $30] Shareholders' Equity, Dec. 31, 2019 $220,000 [1,000 shares x 20% x $30] $104,000 $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, market price per share at the time of distributing the stock dividend shall not be taken into account as it is irrelevant. Accondingly, amount of stock dividends is calculated on the statement of shareholders' equity. $332,500 Income Statement Service Revenue Expenses: Advertising Expense Bad Debt Expense Depreciation Expense-Furniture Rent Expense Salary Expense Income Tax Expense Total Expenses Net Income Though stock dividend will decrease retained earnings by market value of stocks issued as dividends, shareholders' equity will increase by same amount. As a result, net effect of stock dividend will be zero on total shareholders' equity. In simple words, decrease in retained earnings will be set off by increase in shareholders' equity by same value. $14,000 $4,000 $0 $35,500 $109,000 $30,000 $192,500 $140,000 ($332500 - $192500] When 2-for-1 stock split was done on December 31, 2019, 2 shares would have been issued for every 1 existing share. 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 after stock split. It will just increase the number of shares issued only but does not affect the amount of equity reported. As a result, stock split will not appear on statement of shareholders' equity for the period. However, it would be useful while calculating cash dividend per share or stock dividend after such stock split date.