Question

On January 1, 2019, Kittson Company had a retained earnings balance of $218,600. It is subject to a 30% corporate income tax rate. During 2019, Kittson earned net income of $67,000, and the following events occurred:

1.	Cash dividends of $3 per share on 4,000 shares of common stock were declared and paid.
2.	A small stock dividend was declared and issued. The dividend consisted of 600 shares of $10 par common stock. On the date of declaration, the market price of the company’s common stock was $36 per share.
3.	The company recalled and retired 500 shares of $100 par preferred stock. The call price was $125 per share; the stock had originally been issued for $110 per share.
4.	The company discovered that it had erroneously recorded depreciation expense of $45,000 in 2018 for both financial reporting and income tax reporting. The correct depreciation for 2018 should have been $20,000. This is considered a material error.

Required:

1.	Prepare journal entries to record Items 1 through 4.
2.	Prepare Kittson’s statement of retained earnings for the year ended December 31, 2019

CHART OF ACCOUNTSKittson CompanyGeneral Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable on Prior Earnings
271	Dividends Payable

	EQUITY
305	Preferred Stock
311	Common Stock
315	Common Stock to be Distributed
321	Additional Paid-in Capital on Preferred Stock
324	Additional Paid-in Capital from Stock Dividend
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

Amount Descriptions
Adjusted retained earnings, January 1, 2019
Cash dividends
Correction of overstatement in 2018 depreciation expense, net
Net income
Reduction of retained earnings due to retirement of preferred stock
Retained earnings, as previously reported, January 1, 2019
Retained earnings, December 31, 2019
Stock dividend

Answer 1

Transaction	Account Titles and explantion	Debit	Credit
1	Retained Earnings	$12,000
	Dividend Payable		$12,000
	Dividend Payable	$12,000
	Cash		$12,000
2	Retained Earnings	$21,600		(600 x $36)
	Common Stock to be Distributed		$6,000	(600 x $10)
	Additional Paid-in Capital from Stock Dividend		$15,600
	Common Stock to be Distributed	$6,000
	Common Stock		$6,000
3	Preferred Stock	$50,000		(500 x $100)
	Additional Paid-in Capital on Preferred Stock	$5,000		(500 x $10)
	Retained Earnings	$7,500		Balance
	Cash		$62,500	(500 x $125)
4	Accumulated Depreciation	$17,500		($25,000 x .70)
	Retained Earnings		$17,500