Page 554 - Accounting Principles (A Business Perspective)

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Other revenue 150,000
Depreciation and maintenance on rental equipment 270,000
Stock dividend on common stock 300,000
Operating income on Plastics Division up to point of sale in 2009 50,000
Gain on disposal of Plastics Division 25,000
Litigation loss (has never occurred before) 400,000
Cumulative positive effect on prior years' income of changing to a 80,000
different depreciation method
Assume the applicable federal income tax rate is 40 per cent. All of the preceding items of expense, revenue, and
loss are included in the computation of taxable income. The litigation loss resulted from a court award of damages
for patent infringement on a product that the company produced and sold in 2005 and 2006, but was discontinued
in 2006. In addition, the company discovered that in 2005 it had erroneously charged to expense the USD 250,000
cost of a tract of land purchased that year and had made the same error on its tax return for 2008. Retained
earnings as of 2009 January 1, were USD 5,600,000. Assume there were 10,000 shares of common stock and 5,000
shares of preferred stock outstanding for the entire year.

Prepare an income statement and a statement of retained earnings for 2009.
Beyond the numbers—Critical thinking
Business decision case A The stockholders' equity section of the Bates Corporation's balance sheet for 2009
June 30, follows:
Stockholders' equity:
Paid-in Capital:
Common stock - $20 par value; authorized $1,600,000
200,000 shares; issued and outstanding
80,000 shares
Paid-in capital in excess of par value 960,000
Total paid-in capital $2,560,000
Retained earnings 1,520,000
Total stockholders' equity $4,080,000
On 2009 July 1, the corporation's directors declared a 10 per cent stock dividend distributable on August 2 to
stockholders of record on July 16. On 2009 November 1, the directors voted a USD 2.40 per share annual cash
dividend payable on December 2 to stockholders of record on November 16. For four years prior to 2009, the
corporation had paid an annual cash dividend of USD 2.52.
As of 2009 July 1, Bob Jones owned 8,000 shares of Bates Corporation's common stock, which he had
purchased four years earlier. The market value of his stock was USD 48 per share on 2009 July 1, and USD 43.64

per share on 2009 July 16.
a. What amount of cash dividends will Jones receive in 2009? How does this amount differ from the amount of
cash dividends Jones received in the previous four years?
b. Jones has asked you, his CPA, to explain why the price of the stock dropped from USD 48 to USD 43.64 on
2009 July 16. Write a memo to Jones explaining your answer.
c. Do you think Jones is better off as a result of the stock dividend and the USD 2.40 cash dividend than he
would have been if he had just received the USD 2.52 cash dividend? Write a memo to Jones explaining your

answer.
Business decision case B The following journal entries are for Keel Corporation:
1.
Retained earnings 12,000
Reserve for uncollectible accounts 12,000
To record the adjusting entry for
uncollectible accounts.

Accounting Principles: A Business Perspective 555 A Global Text