The post-closing trial balance of Jajoo Corporation at December 31, 2014, contains the following shareholders’ equity accounts:
$5 noncumulative preferred shares (10,000 issued)………………$1,100,000
Common shares (400,000 issued)………………………………….2,000,000
Retained earnings………………………………………………….3,146,000
A review of the accounting records reveals the following:
1. The January 1, 2014, balance in Common Shares was $1,280,000 (320,000 shares), the balance in Contributed Surplus—Reacquisition of Shares was $30,000, and the balance in Retained Earnings was $2,443,500.
2. One of the company’s shareholders needed cash for a personal expenditure. On January 15, the company agreed to reacquire 20,000 shares from this shareholder for $7 per share.
3. On July 1, the company corrected a prior period error that resulted in an increase to the Long-Term Investments account, as well as to the prior year’s profit of $250,000 before income tax.
4. On October 1, 100,000 common shares were sold for $8 per share.
5. The preferred shareholders’ dividend was declared and paid in 2014 for two quarters. Due to a cash shortage, the last two quarters’ dividends were not paid.
6. Profit for the year before income tax was $760,000. The company has a 25% income tax rate.
Instructions
(a) Open general ledger accounts for the shareholders’ equity accounts listed in (1) above and enter opening balances.
(b) Prepare journal entries to record transactions (2) to (5) and post to general ledger accounts.
(c) Prepare entries to close dividends and the Income Summary account and post.
(d) Prepare a statement of changes in shareholders’ equity for the year.
(e) Compare the balances in the general ledger accounts with the closing balances on the statement of changes in shareholders’ equity.
Taking It Further
Why is the prior period adjustment for the error in a prior year’s profit recorded in the Retained Earnings account instead of being a correction to profit in the 2014 financial statements?
SOLUTION
(a), (b) and (c)
Preferred Shares
| Date | Explanation | Ref. | Debit | Credit | Balance |
|---|---|---|---|---|---|
| Jan. 1 | Balance (10,000) | 1,100,000 |
Common Shares
| Date | Explanation | Ref. | Debit | Credit | Balance |
|---|---|---|---|---|---|
| Jan. 1 15 Oct. 1 | Balance (320,000) Reacquisition of shares (20,000) Issue of shares (100,000) | J1 J1 | 80,000 | 800,000 | 1,280,000 1,200,000 2,000,000 |
Contributed Surplus—Reacquisition of Common Shares
| Date | Explanation | Ref. | Debit | Credit | Balance |
|---|---|---|---|---|---|
| Jan. 1 15 | Balance Reacquisition of shares | J1 | 30,000 | 30,000 0 |
Retained Earnings
| Date | Explanation | Ref. | Debit | Credit | Balance |
|---|---|---|---|---|---|
| Jan. 1 15 July 1 Dec. 31 31 | Balance Reacquisition of shares Prior period error Income Summary Dividends | J1 J1 J1 J1 | 30,000 25,000 | 187,500 570,000 | 2,443,500 2,413,500 2,601,000 3,171,000 3,146,000 |
(b)
| GENERAL JOURNAL | J1 | ||
|---|---|---|---|
| Date | Account Titles and Explanation | Debit | Credit |
| Jan. 15 | Common Shares ($4(1) × 20,000) | 80,000 | |
| Contributed Surplus—Reacquisition | |||
| of Shares | 30,000 | ||
| Retained Earnings | 30,000 | ||
| Cash (20,000 × $7) | 140,000 |
(1) $1,280,000 ÷ 320,000 = $4
Mar. 31 Cash Dividends—Preferred 12,500
Cash (10,000 × $5 × ¼) 12,500
Jun. 30 Cash Dividends—Preferred 12,500
Cash (10,000 × $5 × ¼) 12,500
Jul. 1 Long-Term Investments 250,000
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