Question

Comprehensive Dakota Corporation had the following shareholders' equity account balances at December 31, 2018: Preferred stock $1,800,000 Additional paid-in capital on preferred stock 90,000 Common stock 5,150,000 Additional paid-in capital on common stock 3,500,000 Retained earnings 4,000,000 Unrealized decrease in value of marketable equity securities 245,000 Treasury common stock 270,000 Transactions during 2019 and other information relating to the shareholders' equity accounts were as follows: 1. Dakota's preferred and common shares are traded on the over-the-counter market. At December 31, 2018, Dakota had 100,000 authorized shares of $100 pac, 10%, cumulative preferred stock; and 3,000,000 authorized shares of no-par common stock with a stated value of $5 per share. 2. On January 9, 2019, Dakota formally retired all 30,000 shares of its treasury common stock and had them revert to an unissued basis. The treasury stock had been acquired on January 20, 2018. The shares were originally issued at $10 per share. 3. Dakota owned 10,000 shares of Bush Inc. common stock purchased in 2016 for $750,000. The Bush stock was included in Dakota's short-term marketable securities portfolio at the end of 2018 at a value of $650,000, On February 13, 2019, Dakota declared a dividend in kind of share of Bush for every 100 shares of Dakota common stock held by shareholders of record on February 27, 2019. The market price of Bush common stock was $63 per share on February 13, 2019. The dividend in kind was distributed on March 12, 2019. 4. On April 2, 2019, 250,000 stock rights were issued to the common shareholders permitting the purchase of new share of common stock in exchange for I right and $11 cash. On April 23, 2019, 210,000 stock rights were exercised when the market price of Dakota's common stock was $13 per share. Dakota issued new shares to settle the transaction. The remaining 40,000 rights were not exercised and expired. 5. On December 10, 2019, Dakota declared the yearly cash dividend on preferred stock, payable on January 14, 2020, to shareholders of record on December 31, 2019. 6. After the year-end adjustment, the Unrealized Decrease in value of Marketable Equity Securities account had a debit balance of $135.000 at December 31, 2019 7. On January 14, 2020, before the accounting records were closed for 2019, Dakota became aware that rent income for the year ended December 31, 2018, was overstated by $500,000. The after-tax effect on 2018 net income was $275,000. The appropriate correcting entry was recorded the same day. 8. After correcting the rent income, net income for 2019 was $2,600,000 Required:

Answer 1

Step-1
Retained earnings: Retained earnings are cumulative profits of a company after deducting dividends. Therefore, all year’s profits will be added to this fund similarly if the company gets a loss then it will be retained from this amount. Retained earnings will be reported in the stockholders’ equity section of the balance sheet.

Step-2
(1) Prepare the statement of retained earnings for the year ended December 31, 2019:

Particulars Amount
Opening balance of retained earning $4,000,000
Retired treasury stock (refer note 1) $30,000
Stock right with cash (210000x$11) $2,310,000
Declared cash dividend on Preferred stock ($180,000)
Unrealized decreased in value of Marketable securities ($135,000)
Net income $2,600,000
Retained earnings closing balance $8,625,000

Working Notes:
Opening balance of treasury common stock $270,000
Less: unissued and retire treasury common stock $300,000
Total retired treasury stock $30,000

(2) Prepare the shareholder’s equity statement (or) equity section of the balance sheet at December 31, 2019

Particulars Amount
Preferred Stock $1,800,000
Additional paid in capital on Preferred stock $90,000
Common stock $5,150,000
Additional paid in capital on common stock $3,500,000
Marketable Securities $650,000
*Stock Dividend $7,500
Issued Stock right(refer note 3) $420,000
Retained earning    $8,625,000
Total shareholders’ equity $20242,500

Working Notes:
* Stock dividend calculation:
Common stock purchased for $750,000

Stock dividend Bush Comapny = $ 750000/$63

= 11904.76

He declared a dividend of 1 share for every 100 shares.

Therefore, the number of shares is ={11904.76 / 100}119.0476

Stock dividend Bush Comapny = 119.0476 x $63

= $ 7500

Issued Stock right calculation:
250,000 stock rights were issued to the common shareholders permitting the purchase of new share of common stock in exchange for 1 right and $11 cash. The stock rights were exercised when the market price of D common stock was $13 per share.

stock right = (210000 x $13) - (210000 x $11)

= $2730000 - $2310000

= $420000