The post-closing trial balance of Michaud Corporation at December 31, 2021, contains the following shareholders equity accounts:

Question:

The post-closing trial balance of Michaud Corporation at December 31, 2021, contains the following shareholders’ equity accounts:

$4 cumulative preferred shares (15,000 shares issued) ............. $ 850,000
Common shares (250,000 shares issued) ..................................... 3,200,000
Contributed surplus—reacquisition of common shares ................. 20,000
Retained earnings ........................................................................... 1,418,000

A review of the accounting records reveals the following:

1. The January 1, 2021, opening balance in Common Shares was $3,210,000 (255,000 shares), Preferred Shares was $850,000 (15,000 shares), and the balance in Retained Earnings was $980,000.

2. On March 1, 20,000 common shares were sold for $15.50 per share.

3. One of the company’s shareholders needed cash for personal reasons. On July 1, the company agreed to reacquire 25,000 shares from this shareholder for $12 per share.

4. On September 1, the company discovered a $60,000 error that overstated sales in 2020. All sales were made on account. The company has a 30% income tax rate.

5. The preferred shareholders’ dividend was declared and paid in 2021 for three quarters. Due to a cash shortage, the last quarter’s dividend was not paid.

6. Profit for the year before income tax was $750,000.


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

If the amount of the error in sales in 2020 was instead as a result of a change in accounting policy from one revenue recognition policy to another, how would it be accounted for? Is it possible that a change in accounting policy can be accounted for in a similar way to a change in accounting estimate? If so, under what circumstances would this be the case?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Related Book For  book-img-for-question

Accounting Principles Volume 2

ISBN: 978-1119502555

8th Canadian Edition

Authors: Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak

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