The post-closing trial balance of Jajoo Corporation at December 31, 2021, 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, 2021, balance in Preferred Shares was $1,100,000, Common Shares was $1,280,000 (320,000 shares), the balance in Contributed Surplus Reacquisition of Common 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 Investment 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 2021 for two quarters. Due to a cash shortage, the last two quarters’ dividends were not declared or 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 item (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.

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 profi t in the 2021 financial statements?