A company has 60.000 shares of $4 par value common stock and 10.000 shares of 5%

Question

A company has 60.000 shares of $4 par value common stock and 10.000 shares of 5%. S100 par. cumulative preferred stock outstanding. The balance in Retained Earnings account at the beginning of the year was $300,000 and two year's dividends were in arrears at the beginning of the year. Net income for the current year was $400,000. The company paid preferred dividends and $1 per share on its common stock in the current year. What is the balance in Retained laming* account at the end of the year of this year? Pizza Pier retires its 7% bonds for $70,000 before their scheduled maturity. At the time, the bonds have a carrying value of $74,937. Record the early retirement of the bonds. Magic Mountain retires its 8% bonds for $125,000 before their scheduled maturity. At the time, the bonds have a carrying value of $118.000. Record the early retirement of the bonds.

Explanation / Answer

Part 5)

The balance in retained earnings at the end of the year has been calculated with the use of as follows:

__________

Part 6)

The early retirement of bonds at a value less than the carrying value would result in a gain equal to the difference between the retirement value and carrying value. The retirement would involve cash ouflow as indicated by a credit to cash account. The journal entry for early retirement of bonds is given below:

__________

Part 7)

The early retirement of bonds at a value higher than the carrying value would result in a loss equal to the difference between the retirement value and carrying value. The retirement would involve cash ouflow as indicated by a credit to cash account. The journal entry for early retirement of bonds is given below:

__________

Part 8)

In this case, the bonds have been retired at the carrying value itself. Therefore, no loss or gain will arise. The journal entry for early retirement of bonds is given below:

Opening Balance of Retained Earnings 300,000 Add Net Income 400,000 Less Preference Dividend in Arrears (10,000*100*5%*2) 100,000 Preference Dividend for Current Year (10,000*100*5%) 50,000 Dividend on Common Stock (60,000*1) 60,000 Ending Balance of Retained Earnings $490,000

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