Problem-03: Corporations: Dividends, Retained Earnings, and Income Reporting

The post-closing trial balance of Storey Corporation at December 31, 2020, contains the following stockholders equity accounts

A review of the accounting records reveals the following.

1. No errors have been made in recording 2020 transactions or in preparing the closing entry for net income.
2. Preferred stock is $50 par, 6%, and cumulative; 15,000 shares have been outstanding since January 1, 2019.
3. Authorized stock is 20,000 shares of preferred, 500,000 shares of common with a $10 par value.
4. The January 1 balance in Retained Earnings was $1,170,000.
5. On July 1, 20,000 shares of common stock were issued for cash at $16 per share.
6. On September 1, the company discovered an understatement error of $90,000 in computing salaries and wages expense in 2019. The net of tax effect of $63,000 was properly debited directly to Retained Earnings.
7. A cash dividend of $250,000 was declared and properly allocated to preferred and common stock on October 1. No dividends were paid to preferred stockholders in 2019.
8. On December 31, a 10% common stock dividend was declared out of retained earrings on common stock when the market price per share was $16
9. Net income for the year was $585,000
10. On December 31, 2020, the directors authorized disclosure of a $200,000 restriction of retained earnings for plant expansion. (Use Note x.)

Instruction

1. Reproduce the Retained Earnings account (T-account) for 2020.
2. Prepare a retained earnings statement for 2020.
3. Prepare a stockholders' equity section at December 31, 2020.
4. Compute the allocation of the cash dividend to preferred and common stock.

Solution