Question

Balthus Corp. reports the following components of stockholders’ equity on December 31, 2016:

Common stock—\(1 par value, 320,000 shares authorized,

200,000 shares issued and outstanding . .. . . . . . . . . . . . . . . . . . . . \) 200,000

Paid-in capital in excess of par value, common stock . . . . . . . . . . . . . . . . 1,400,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 2,160,000

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . \(3,760,000

It completed the following transactions related to stockholders’ equity in year 2017:

Jan. 10 Purchased 40,000 shares of its own stock at \)12 cash per share.

Mar. 2 Directors declared a \(1.50 per share cash dividend payable on March 31 to the March 15 stockholders of record.

Mar. 31 Paid the dividend declared on March 2.

Nov. 11 Sold 24,000 of its treasury shares at \)13 cash per share.

Nov. 25 Sold 16,000 of its treasury shares at \(9.50 cash per share.

Dec. 1 Directors declared a \)2.50 per share cash dividend payable on January 2 to the December 10 stockholders of record.

Dec. 31 Closed the $1,072,000 credit balance (from net income) in the Income Summary account to Retained Earnings.

Required

1. Prepare journal entries to record each of these transactions for 2017.

2. Prepare a statement of retained earnings for the year ended December 31, 2017.

3. Prepare the stockholders’ equity section of the company’s balance sheet as of December 31, 2017.

Short answer

1. When the company purchased its own stock, the treasury stock is debited, and the cash is credited.
2. The balance of the retained earnings as on December 31, 2017, is $2,476,000.
3. The total stockholder's equity is $4,076,000.

Step-by-step solution

Meaning of Retained Earnings

Retained earnings refer to the profits of a company, which can be used for further reinvestment or it could also refer to the remaining portion of a company's profit after paying all the costs.

Step 2: Journal Entries

Date	Account and Explanation	Debit ($)	Credit ($)
Jan 10	Treasury Stock, Common	480,000
	Cash		480,000
	(To purchase 40,000 common shares at $12 per share)
Mar 02	Retained Earnings	300,000
	Common Dividend Payable		300,000
	(To declare $1.5 per common share cash dividend on 200,000 shares)
Mar 31	Common Dividend Payable	300,000
	Cash		300,000
	(To pay $1.5 per common share cash dividend on 200,000 shares)
Nov 11	Cash	312,000
	Treasury Stock, Common		288,000
	Paid-In Capital, Treasury Stock		24,000
	(To receive $13 per share for 24000 treasury shares costing $ 12 per shares)
Nov 25	Cash	152,000
	Paid-In Capital, Treasury Stock	24,000
	Retained Earnings	16,000
	Treasury Stock, Common		192,000
	(To receive $9.5 per share for 16000 treasury shares costing $12 per share)
Dec 01	Retained Earnings	500,000
	Common Dividend Payable		500,000
	(To declare $2.5 per common share cash dividend on 200,000 shares )
Dec 10	Common Dividend Payable	500,000
	Cash		500,000
	(To pay $2.5 per common share cash dividend on 200,000 shares)
Dec 31	Income Summary	1,072,000
	Retained Earnings (To record the net Income for the year)		1,072,000

Statement of Retained Earnings

Balthus Corporation Statement of Retained Earnings For Year Ended December 31, 2017	Amount
Retained Earnings as on December 31, 2016	$2160,000
Add: Net Income for the year	1072,000
Less: Loss of sale of treasury stock	(16,000)
Less: Cash Dividend (300,000+500,000)	(800,000)
Add: Dividend on treasury shares	60,000
Retained Earnings as on December 31, 2017	$2,476,000

Stockholders’ Equity     

	Amount
Common stock—$1 par value, 320,000 shares authorized, 200,000 shares issued and outstanding	$200,000
Paid-in capital in excess of par value, common stock	1,400,000
Retained Earnings	$2,476,000
Total stockholders’ equity	$4,076,000