The balance sheet for Umami Sustainable Seafood Inc. reported the following components of equity on December 31, 2014 — Common shares unlimited authorized
Total equity........................................................................................................ $584,000
In 2015, Umami had the following transactions affecting shareholders and the equity accounts:
.:.
Required
1. Prepare journal entries to record the transactions and closings for 2015.
2. Prepare a statement of changes in equity for the year ended December 31, 2015.
3. Prepare the equity section of the corporation’s balance sheet as of December 31, 2015.
Analysis Component: Explain the relationship between assets and retained earnings; use your answer in Part 3 above as part of the explanation.
SOLUTION:
Part 1 Journal entries:
2015
Jan. 5 Cash Dividends or Retained Earnings 64,000
Common Dividend Payable 64,000
Declared dividend on 20,000 outstanding shares
Feb. 28 Common Dividend Payable 64,000
Cash 64,000
Paid cash dividend
July 6 Cash (750 × $38.40) 28,800
Common shares 28,800
Issued common shares
Aug. 22 Cash (1,250 × $27.20) 34,000
Common shares 34,000
Issued common shares
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Sept. 5 Cash Dividends or Retained Earnings 70,400
Common Dividend Payable 70,400
Declared dividend on 22,000 outstanding shares
Oct. 28 Common Dividend Payable 70,400
Cash 70,400
Paid cash dividend
Dec. 31 Income Summary 347,200
Retained Earnings 347,200
Closed the Income Summary account
31 Retained Earnings 134,400
Cash Dividends 134,400
Closed the cash dividend account (Note: No entry is required
if Retained Earnings was debited in the Sept. 5 entry and Jan. 5 entry).
Part 2
UMAMI SUSTAINABLE SEAFOOD INC. Statement of Changes in Equity For Year Ended December 31, 2015
Common Shares
Retained Earnings
Total Equity
Balance, January 1
$ 368,000
$ 216,000
$ 584,000
Issuance of shares
62,800
62,800
Net income (loss)
347,200
347,200
Dividends
(134,400)
(134,400)
Balance, December 31
$ 430,800
$ 428,800
$ 859,600
Part 3
UMAMI SUSTAINABLE SEAFOOD INC.
Equity Section of the Balance Sheet
December 31, 2015
Contributed capital:
Common shares, unlimited shares
authorized, 22,0001 shares issued
And outstanding $430,8001
Retained earnings 428,800
Total equity $859,600
Calculations:
1. Common Shares:
1. Common Shares:
Shares
Dollars
Jan. 1
Balance brought forward
20,000
$368,800
July 6
Issued 750 shares (750 x $38.40)
750
28,800
Aug. 22
Issued 1,250 shares (1,250 x $27.20)
1,250
34,000
Totals
22,000
$430,800
Analysis component:
The relationship between assets and retained earnings is that retained earnings represents how much of the assets are financed by the accumulated profits less losses less distributions of dividends. In other words, retained earning is a component of equity and we know that assets are financed in part by equity. Using the information in Part (3) above for Umami Sustainable Seafood Inc., we know that $428,800 of the assets is financed by retained earnings as at December 31, 2015.