Problem 14: The Stockholders’ Equity Accounts Of Falk Compan
Problem 14 2athe Stockholders Equity Accounts Of Falk Company At Janu
The stockholders’ equity accounts of Falk Company at January 1, 2012, are as follows. Preferred Stock, 6%, $50 par $625,000 Common Stock, $4 par 636,000 Paid-in Capital in Excess of Par—Preferred Stock 187,300 Paid-in Capital in Excess of Par—Common Stock 306,900 Retained Earnings 798,400 There were no dividends in arrears on preferred stock. During 2012, the company had the following transactions and events. July 1 Declared a $0.7 cash dividend on common stock. Aug. 1 Discovered $27,400 understatement of 2011 depreciation on equipment. Ignore income taxes. Sept. 1 Paid the cash dividend declared on July 1. Dec. 1 Declared a 14% stock dividend on common stock when the market value of the stock was $19 per share. 15 Declared a 6% cash dividend on preferred stock payable January 15, 2013. 31 Determined that net income for the year was $392,700. 31 Recognized a $218,500 restriction of retained earnings for plant expansion. (a) Journalize the transactions, events, and closing entry. Credit account titles are automatically indented when amount is entered. Do not indent manually. Date Account Titles and Explanation Debit Credit July 1 [removed] [removed] [removed] Aug. 1 [removed] [removed] [removed] Sept. 1 [removed] [removed] [removed] Dec. 1 [removed] [removed] [removed] Dec. 15 [removed] [removed] [removed] Dec. 31 [removed] [removed] [removed] (To close net income) [removed] [removed] [removed] (To close cash dividends) [removed] [removed] [removed] (To close stock dividends)
Paper For Above instruction
The following paper provides detailed journal entries for Falk Company's 2012 transactions, including the declaration and payment of dividends, the recording of depreciation adjustments, the recognition of stock dividends, and the closing entries for net income and dividends. These entries reflect the company's transactions based on provided data, ensuring adherence to accounting principles and accurate reflection of changes in stockholders’ equity.
Journal Entries for Falk Company Transactions in 2012
1. July 1 – Declaration of a $0.7 cash dividend on common stock
The company declares a cash dividend on common stock. The calculation is based on the number of common shares outstanding, derived from common stock value and par value.
Number of common shares = $636,000 / $4 = 159,000 shares.
Dividend declaration: 159,000 shares x $0.70 = $111,300.
Journal Entry:
| Account Title | Debit | Credit |
|---|---|---|
| Dividends — Common Stock | $111,300 | |
| Dividends Payable — Common Stock | $111,300 |
2. August 1 – Recognition of depreciation understatement
An adjustment is made to recognize the understatement of depreciation for 2011. The correction increases depreciation expense and reduces equipment’s book value, but since expenses are not detailed here, an adjusting entry increases accumulated depreciation.
Journal Entry:
| Account Title | Debit | Credit |
|---|---|---|
| Accumulated Depreciation - Equipment | $27,400 | |
| Retained Earnings | $27,400 |
3. September 1 – Payment of declared dividend
The company pays the cash dividend declared on July 1.
Journal Entry:
| Account Title | Debit | Credit |
|---|---|---|
| Dividends Payable — Common Stock | $111,300 | |
| Cash | $111,300 |
4. December 1 – Declaration of 14% stock dividend on common stock
Number of new shares issued as stock dividend: 14% of existing shares.
Existing shares: 159,000.
Shares issued in dividend: 159,000 x 14% = 22,260 shares.
Market value per share = $19.
Total market value of dividend shares: 22,260 x $19 = $423,540.
Journal Entry:
| Account Title | Debit | Credit |
|---|---|---|
| Stock Dividends Distributable | $423,540 | |
| Common Stock Dividends Distributable | 22,260 shares x $4 par = $89,040 | |
| Paid-in Capital in Excess of Par — Common Stock | Difference: $423,540 - $89,040 = $334,500 |
5. December 15 – Declaration of 6% cash dividend on preferred stock payable January 15, 2013
Preferred stock: 6% of par value, outstanding at $625,000.
Cash dividend on preferred stock = $625,000 x 6% = $37,500.
Journal Entry:
| Account Title | Debit | Credit |
|---|---|---|
| Dividends — Preferred Stock | $37,500 | |
| Dividends Payable — Preferred Stock | $37,500 |
6. December 31 – Recognition of net income and restrictions
Net income: $392,700.
Retained earnings are to be increased by net income.
A restriction of retained earnings of $218,500 is recognized for plant expansion.
Journal Entries:
Closing net income:
| Account Title | Debit | Credit |
|---|---|---|
| Income Summary | $392,700 | |
| Retained Earnings | $392,700 |
Recording restriction of retained earnings:
| Account Title | Debit | Credit |
|---|---|---|
| Retained Earnings | $218,500 | |
| Restricted Retained Earnings | $218,500 |
7. Closing cash dividends and stock dividends
The total dividends declared are summed up and closed to retained earnings.
Cash dividends paid: $111,300 (common) + $37,500 (preferred) = $148,800.
Stock dividends are declared in stock dividend account. Here, for simplicity, assume closing entries are made directly.
| Account Title | Debit | Credit |
|---|---|---|
| Dividends — Common Stock | $111,300 | |
| Dividends — Preferred Stock | $37,500 | |
| Dividends Payable — Common Stock | $111,300 | |
| Dividends Payable — Preferred Stock | $37,500 | |
| Income Summary | $148,800 | |
| Retained Earnings | $148,800 |
Conclusion
These journal entries reflect the proper recording of Falk Company's 2012 transactions, including dividend declarations and payments, depreciation adjustments, stock dividends, and the closing process. Adjustments to retained earnings and the recognition of restrictions further ensure accurate financial reporting and compliance with accounting standards.
References
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- Accounting Standards Codification (ASC) Topic 505, Equity.
- Financial Accounting Standards Board (FASB). (2016). Accounting Standards Update No. 2016-02.
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