Problem 14-2A The stockholders\' equity accounts of Karp Company at January 1, 2

Question

Problem 14-2A The stockholders' equity accounts of Karp Company at January 1, 2017, are as follows. Preferred Stock, 696, $50 par Common Stock, $3 par Paid-in Capital in Excess of Par-Preferred Stock Paid-in Capital in Excess of Par-Common Stock Retained Earnings 590,000 471,000 185,000 296,000 761,000 There were no dividends in arrears on preferred stock. During 2017, the company had the following transactions and events. July 1 Declared a $0.90 cash dividend per share on common stock. Aug. 1 Discovered $28,000 understatement of depreciation expense in 2016. (Ignore income taxes.) Sept. 1 Paid the cash dividend declared on July 1. Dec. 1 Declared a 15% stock dividend on common stock when the market price of the stock was $20 per share. 15 31 31 Declared a 6% cash dividend on preferred stock payable January 15, 2018. Determined that net income for the year was $362,000. Recognized a $219,000 restriction of retained earnings for plant expansion.

Explanation / Answer

Part 1 - Journal Entry

(Stock dividend recorded for :-

Total Shares = $471000/3 = 157000

Stock Dividend = 157000 * 15% = 23550

And Since Market price is $20 and face value is $3 hence excess paid in capital is $17)

Retained Earnings

Dividend Payable - Preferred stock

(Dividend Payable on preferred stock recorded - $590000*6%)

Income summary

Retained Earnings

(Income is transferred to retained earnings)

Part 2 - Posting of balances

Part 3 - Statement of retained earnings

Karp Company

Retained Earning statement

Part 4 - Balance Sheet

Karp Company

Balance sheet (Partial)

Date Accounts title Debit amount Credit July 1 Retained Earnings $141300 Dividend Payable - Common stock $141300 (Dividend Payable recorded. Calculation - ($471000/3*$0.9) August 1 Retained Earnings $28000 Accumulated Depreciation $28000 (Depreciation provided as it was understated) September 1 Dividend Payable - common stock $141300 Cash $141300 (Entry for paying dividend recorded by closing dividend payable account) December 1 Retained Earnings (23550*20) $471000 Common stock dividend - Distributable (23550*3) $70650 Paid in capital in excess of par value (23550*17) $400350

(Stock dividend recorded for :-

Total Shares = $471000/3 = 157000

Stock Dividend = 157000 * 15% = 23550

And Since Market price is $20 and face value is $3 hence excess paid in capital is $17)

December 15

Retained Earnings

Dividend Payable - Preferred stock

(Dividend Payable on preferred stock recorded - $590000*6%)

$35400 $35400 December 15

Income summary

Retained Earnings

(Income is transferred to retained earnings)

$362000 $362000

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