Question

Company B began 2018 with a $110,000 balance in retained earnings. The following events occurred during...

Company B began 2018 with a $110,000 balance in retained earnings. The following events occurred during the year:

  • Cash dividends of $18,500 were declared.
  • 4,500 shares of callable preferred stock were recalled and retired for a price of $225 per share. The stock was originally issued for $150 per share.
  • Net income was $550,000.
  • A material error in net income for a previous period was corrected. The correction of the error decreased retained earnings by $18,500 after a related income tax.
    The following is required:
    1. Prepare the statement of retained earnings for the year ended 2013, and any note disclosures separately.
    2. Discuss the restriction of retained earnings that the board of directors can impose and why it would be necessary.

Homework Answers

Answer #1

1. Statement of Retained Earnings For the Year Ended Dec.31.2013

Retained Earnings (Beginning) $110,000
Less: Dividends $(18,500)
Retained Earnings Jan.1.2013 (Adjusted) $91,500
Add: Net Income $550,000
Less: Cash Dividend Declared $(18,500)
Less: Recall of Preferred Stock * $(337,500)
Retained Earnings Dec.31.2013 $285,500

*(4,500 Shares × $225 ) - (4,500 Shares × $150) =$1,012,500 - $675,000 =$337,500

2. Board of directors can transfer the balance of retained earnings to any specific reserve so they can retraining the use of this. It helps to allocate the retained earnings.

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