In September Year 1, Wes Corp. made a dividend distribution of one right for eac

Question

In September Year 1, Wes Corp. made a dividend distribution of one right for each of its 140,000 shares of outstanding common stock. Each right was exercisable for the purchase of one-hundredth of a share of West's $50 variable-rate preferred stock at an exercise price of $80 per share. On March 20, Year 5, none of the rights had been exercised, and West redeemed them by paying each stockholder $0.20 per right. As a result of this redemption, West's stockholders' equity was reduced by A. $0 B. $28,000 C. $140,000 D. $14,000 The following trial balance of Trey Co. at December 31, 20X5 has been adjusted, except for income tax expense. Dr. Cr. Cash $560,000 Accounts receivable, net 1,655,000 Prepaid taxes 350,000 Accounts payable $124,000 Common stock 560,000 Additional paid-in capital 770,000 Retained earnings 740,000 Foreign currency translation adjustment 550,000 Revenues 3950000 Expenses 3029000 ????? ????? $6,144,000 $6,144,000 Additional information: During 20X5, estimated tax payments of $368,400 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between financial statement and income tax income, and Trey's tax rate is 40%. Included in accounts receivable is $600,000 due from a customer. Special terms granted to this customer require payment in equal semiannual installments of $150,000 every April 1 and October 1. In Trey's December 31, 20X5 balance sheet, what amount should be reported as total retained earnings? A. $1,384,700 B. $1,292,600 C. $740,000 D. $644,700 In September Year 1, Wes Corp. made a dividend distribution of one right for each of its 140,000 shares of outstanding common stock. Each right was exercisable for the purchase of one-hundredth of a share of West's $50 variable-rate preferred stock at an exercise price of $80 per share. On March 20, Year 5, none of the rights had been exercised, and West redeemed them by paying each stockholder $0.20 per right. As a result of this redemption, West's stockholders' equity was reduced by A. $0 B. $28,000 C. $140,000 D. $14,000 The following trial balance of Trey Co. at December 31, 20X5 has been adjusted, except for income tax expense. Dr. Cr. Cash $560,000 Accounts receivable, net 1,655,000 Prepaid taxes 350,000 Accounts payable $124,000 Common stock 560,000 Additional paid-in capital 770,000 Retained earnings 740,000 Foreign currency translation adjustment 550,000 Revenues 3950000 Expenses 3029000 ????? ????? $6,144,000 $6,144,000 Additional information: During 20X5, estimated tax payments of $368,400 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between financial statement and income tax income, and Trey's tax rate is 40%. Included in accounts receivable is $600,000 due from a customer. Special terms granted to this customer require payment in equal semiannual installments of $150,000 every April 1 and October 1. In Trey's December 31, 20X5 balance sheet, what amount should be reported as total retained earnings? A. $1,384,700 B. $1,292,600 C. $740,000 D. $644,700

Explanation / Answer

SOLUTION

Question - 1

Option B is correct. West's stockholders' equity was reduced by $28,000

Explanation: In Year 1, no dividend was recorded since none of the rights were exercised and no value was assigned. In Year 5, redemption reduced equity by $28,000 [140,000 rights * $0.20 per share]

Question - 2

Correct option is Option B. Retained earnings at December 31, 2015 = $1,292,600

Income before tax = Revenues - Expenses

= $3,950,000 - $3,029,000 = $921,000

Tax rate = 40%

Tax = $921,000 * 40% = $368,400

Net income = $921,000 - $368,400 = $552,600

Retained earnings at December 31, 2015 would be the sum of the beginning retained earnings and the net income.

Retained earnings at December 31, 2015 = Beginning retained earnings + Net income

= $740,000 + $552,600 = $1,292,600

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