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Exam 12: Income and Changes in Retained Earnings

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Question 41

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The statement of retained earnings:

A) Includes prior period adjustments, cash dividends, and stock dividends.
B) Indicates the amount of cash available for the payment of dividends.
C) Need not be prepared if a separate statement of stockholders' equity accompanies the financial statements.
D) Shows revenue, expenses, and dividends for the accounting period.

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Question 42

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On January 31, Village Bank had 500,000 shares of $3 par value common stock outstanding. On that date, the company declared a 10% stock dividend when the market price of the stock was $62 per share. The immediate effect of this dividend upon Village Bank was:

A) A reduction in cash of $3,794,500.
B) A reduction in retained earnings of $3,100,000.
C) A reduction in retained earnings of $150,000.
D) A liability to the stockholders of $150,000.

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Question 43

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Discontinued operations The operations of Global Entertainment, Inc., for the current year are summarized below: Global Entertainment had 400,000 shares of capital stock outstanding. Complete the following condensed income statement for the year, including the appropriate earnings per share figures. $\begin{array} { | l | c | c | } \hline & \text { From } & { \text { From } } \\\hline & \text { Continuing } & \text { Discontinued } \\\hline & \text { Operations } & \text { Segment } \\\hline \text { Net sales } & \$ 8,060,000 & \$ 2,275,000 \\\hline \text { Costs and expenses (including } & & \\\hline \text { applicable income taxes } & 6,890,000 & 3,315,000 \\\hline \text { Gain on disposal of discontinued } & & \\\hline \text { segment, net of income taxes } & & 676,000 \\\hline\end{array}$ $\text {GLOBAL ENTERTAINMENT, INC.}$ $\text {Income Statement}$ $\text {For the Year Ended December 31, 2010}$ $\begin{array}{|ll|c|} \hline \text { Net sales } & \text { } & \$\\\hline \text { Costs and expenses (including applicable } & \text { } & \text { }\\\hline \text { income taxes) } & \text { } & \text { }\\ \hline\text { } & \text { } & \text { }\\\hline \text { } & \text { } & \text { }\\\hline \text { Earnings per share: } & \text { } & \text { }\\\hline\end{array}$

Stock dividends and stock split-journal entries Eagle Corporation has 250,000 shares of $6 par value capital stock outstanding. Prepare journal entries in the space provided to record the following transactions during the current year: $\begin{array}{|l|l|}\hline \text { Feb. 10 } & \text { Declared a } 25 \% \text { stock dividend. Market price per share was } \$ 22 . \\\hline \text { Mar. 15 } & \text { Issued the shares for the stock dividend declared on February } 10 . \\\hline \text { June 30 } & \begin{array}{l}\text { Distributed additional shares of capital stock in a 2-for-1 stock split. Market } \\\text { price }\end{array} \\\hline &\text { per share was } \$ 40 \text { immediately before the stock split. } \\\hline\text { Oet. } 17& \text { Declared a } 10 \% \text { stock dividend. Market price per share was } \$ 24 . \\\hline \end{array}$ $\begin{array}{l}\begin{array}{|l|r|r|r|}\hline&\text { General Journal }&\quad\quad&\quad\quad\\\hline 20 \\\hline \text { Feb.10 } \\\hline \\\hline \\\hline \\\hline \text { Mar. 15 } \\\hline \\\hline \\\hline \\\hline \text { June 30 } \\\hline \\\hline \\\hline \\\hline \text { Oct. 17 } \\\hline \\\hline\end{array}\\\end{array}$

Special sections in an income statement What is the purpose of arranging an income statement to show subtotals for Income from Continuing Operations and for Income before Extraordinary Items?

The stockholders' equity section of the balance sheet of Caesar Corporation at December 31, 2009, appears as follows: (The company engaged in no treasury stock transactions prior to 2009) $\begin{array}{lrr} \text { Stockholders' Equity } &\\ \text { \$ 2 preferred stock, \$100 par, 10,000 shares authorized, 8,000 shares issued } &\$800,000\\ \text { Common stock, \( \$ 2 \) par, 100,000 shares authorized, 75,000 shares } &\\ \text {issued, 5,000 are held in the treasury } &150,000\\\\ \text { Additional Paid-in Capital: } &\\\text { From issuance of preferred stock } & 80,000 \\\text { From issuance of common stock } & 225,000 \\\text { From treasury stock transactions } & 8,000 \\\text { From common stock dividends } & 26,000\\ \text { Total paid-in capital } &1,289,000\\ \text {Retained earnings ( \( \$ 40,000 \) equal to cost of treasury stock is } &\\ \text { not available for dividends) } &500,000\\&1,789,000\\ \text {Less treasury stock (at cost: 5,000 common shares) }&(40,000) \\ \text {Total Stockholders' equity}&\$1,749,000\end{array}$ -Refer to the information above. Assume that all remaining treasury stock is reissued at a price of $14 per share in January of 2010. What amount should be credited to the account Additional Paid-In Capital: Treasury Stock Transactions in the journal entry to record this transaction?

The stockholders' equity section of the balance sheet of Global Publishing at December 31, 2009, appears as follows: Answer the following questions based on the stockholders' equity section given above. The company had no treasury stock purchases before 2009. $\begin{array}{lc}\text { Stockholders' equity: }\\ \text { 5 \% preferred stock, \$ 100 par,}\\ \text { 50,000 shares authorized, ?? shares issued}&\$1,200,000\\ \text { Common stock, \$2 par, 500,000 shares authorized,}\\ \text { 140,000 shares issued, of which ?? are held in treasury}&280,000\\ \text { Additional paid-in capital:}\\ \text { From issuance of preferred stock. } & 288,000 \\ \text { From issuance of common stock. } & 840,000 \\ \text { From treasury stock transactions} & 16,000 \\\text { From common stock dividends } & 400,000 \\\text { Total paid-in capital}&\$3,024,000\\\text { Retained earnings ( \$ 112,000 equal to cost of treasury}\\\text { tock is not available for dividends) }&880,000\\&\$3,904,000\\\text { Less: Treasury stock (at cost: 14,000 common shares) . }&\underline{(112,000) }\\\text { Total stockholders' equity}&\underline{\$3,792,000}\end{array}$ -If Global Publishing had reacquired 16,000 shares of treasury stock early in 2009, then some treasury stock must have been sold during 2009 for:

Which of the following situations would not be presented in a separate section of the current year's income statement of Hamilton Corporation? (More than one answer may be correct.) During the current year:

Accounting changes and prior period adjustment Prior period adjustments affect the income of past accounting periods. Explain how prior period adjustments are shown in the financial statements.

Prior period adjustments are shown in the financial statements by adjusting the beginning balance of retained earnings in the statement of retained earnings.

Fuller Mfg.'s financial statements for the current year include the following: Income from continuing operations $663,200 Prior period adjustment (increase in prior-year net income, net of taxes) 180,000 Cash dividends paid to preferred stockholders 196,800 Gain from discontinued operations (net of taxes) 433,600 Extraordinary loss (net of tax benefit) 174,400 On the basis of this information, net income for the current year is:

Equity transactions-journal entries A partial list of the ledger accounts of Soundview Corporation is shown below, followed by a list of transactions. Indicate the accounts that would be debited and credited in recording each transaction by placing the appropriate account number(s) in the space provided. If no journal entry is required for a particular transaction, use "None." $\begin{array}{|l|l|l|l|}\hline 1 & \text { Cash } & 30 & \text { Retained Earnings } \\\hline 10 & \text { Dividends Payable } & 31 & \text { Dividends } \\\hline 20 & \text { Common Stock, \$1 par } & 45 & \text { All Revenue and Gains } \\\hline 21 & \text { Additional Paid-In Capital } & 50 & \text { All Expenses and Losses } \\\hline 24 & \text { Stock Dividend to Be Distributed } & & \\\hline 25 & \text { Treasury Stock } & & \\\hline\end{array}$ $\begin{array} { | l | l | l | l | } \hline & \text { Transactions } & \begin{array} { l } \text { Account(s) } \\\text { Debited }\end{array} & \begin{array} { l } \text { Account(s) } \\\text { Credited }\end{array} \\\hline & \begin{array} { l } \text { Example: Issued common stock for cash at a } \\\text { price above par. }\end{array} & 1 & 20,21 \\\hline \text { (a) } & \begin{array} { l } \text { Declared a } 10 \% \text { stock dividend. Market price per } \\\text { share is higher than par. }\end{array} & & \\\hline \text { (b) } & \text { Declared a cash dividend on common stock. } & & \\\hline \text { (c) } & \begin{array} { l } \text { Issues shares pursuant to stock dividend declared } \\\text { in (a), above. }\end{array} & & \\\hline \text { (d) } & \text { The dividend declared in (b), above, is paid. } & & \\\hline \text { (e) } & \begin{array} { l } \text { Reacquired shares of Soundview common stock } \\\text { on the open market. }\end{array} & & \\\hline \text { (f) } & \begin{array} { l } \text { Reissued some of the shares reacquired in (e), } \\\text { above, at a price higher than cost. }\end{array} & & \\\hline \text { (g) } & \begin{array} { l } \text { Declared and distributed a 100\% stock dividend. } \\\text { Market price per share is higher than par value. }\end{array} & & \\\hline \text { (h) } & \begin{array} { l } \text { Declared and distributed a 2-for-1 stock split. } \\\text { Market price per share is higher than par value. }\end{array} & & \\\hline\end{array}$

Which of the following items would be included in the discontinued operations section of the income statement?

In computing earnings per share, the number of shares used is:

A prior period adjustment to retained earnings is made when a discovery of a material error was made to prior years' income.

The amount of earnings per share is usually computed:

Comprehensive income can be displayed to users of financial statements in which of the following way(s) :

Which of the following is (are) not true about a stock dividend?

Earnings per share-basic and diluted Stainless Corporation had net income of $7,800,000 in 2010. The company had 500,000 shares of $4 par value common stock and 70,000 shares of 8%, $100 par, convertible preferred stock outstanding throughout the year. Each share of preferred stock is convertible into two shares of common stock. Compute the following for 2010: (a) The number of shares to be used in computing basic earnings per share. (b) The number of shares to be used in computing diluted EPS. (c) Basic earnings per share.

In determining earnings per share when a preferred stock has dividends in arrears, only the current year's dividend is deducted to arrive at earnings per share.