The stockholders’ equity accounts of Fernandez, Inc., at January 1, 2012, are as follows.

Preferred Stock, no par, 4,000 shares issued             $400,000
Common Stock, no par, 140,000 shares issued            700,000
Retained Earnings                                                        500,000

During 2012, the company had the following transactions and events.

July   1 Declared a $0.50 cash dividend on common stock.
Aug.  1 Discovered a $72,000 overstatement of 2011 depreciation expense. (Ignore income taxes.)
Sept.  1 Paid the cash dividend declared on July 1.
Dec.   1 Declared a 10% stock dividend on common stock when the market value of the stock was $12 per share.
        15 Declared a $9 per share cash dividend on preferred stock, payable January 31, 2013.
        31 Determined that net income for the year was $320,000.

  (a) Prepare a retained earnings statement for the year. There are no preferred dividends in arrears.
  (b) Discuss why the overstatement of 2011 depreciation expense is not treated as an adjustment of the current year’s income.
  (c) Discuss the reasons why a company might decide to issue a stock dividend rather than a cash dividend.