The stockholders’ equity accounts of Karp Company at January 1, 2014, are as fol

Question

The stockholders’ equity accounts of Karp Company at January 1, 2014, are as follows.

There were no dividends in arrears on preferred stock. During 2014, the company had the following transactions and events.

Recognized a $201,000 restriction of retained earnings for plant expansion.

Prepare a retained earnings statement for the year

Preferred Stock, 6%, $50 par $580,000 Common Stock, $7 par 1,099,000 Paid-in Capital in Excess of Par—Preferred Stock 190,900 Paid-in Capital in Excess of Par—Common Stock 292,200 Retained Earnings 771,400

Explanation / Answer

Notes:

When a stock dividend is issued, it does not change the market value of the shares or the total value of the stock holders' equity in books of account, however a journal entry is made to the extent of market value of shares transferring the amount from retained earnings to paid in capital, calculated as shown below:

Common stock at par / par value * stock dividend declared * market value of share

(1099000/7)*15%*17

Balance sheet Partial:

Preferred Stock, 6%, $50 par

Statement of Retained Earnings for the year 2014 Opening balance          771,400 Less: Dividend on Common stock (1,099,000/7*.0.6)              94,200 Less: Understatement of 2013 Depreciation              26,900 Net Retained earnings          650,300 Add: Net income earned in 2014            385,100 Less: Dividend on preferref stock (580,000*6%)              34,800 Less: 15% Stock dividend to common stock holders (see notes)            400,350 Net Retained earnings          600,250

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