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    Retained Earnings, Stockholders' Equity and Earning Per Share for Nakona Corporation

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    The ledger of Nakona Corporation as of December 31, 2008, after the books have been closed, contains the following stockholders' equity accounts.

    Preferred Stock (10.000 shares issued) - $1,000,000
    Common Stock ($400,000 shares issued) - $2,000,000
    Paid-in Capital in Excess of Par Value-Preferred - $200,000
    Paid-in Capital in Excess of Stated Value-Common - $1,100,000
    Common Stock Dividends Distributable - $200,000
    Retained Earnings - $2,365,000

    A review of the accounting records reveals the following.
    1. No errors have been made in recording 2008 transactions or in preparing the closing entry for net income.
    2. Preferred stock is 8%, $100 par value, noncumulative, and callable at $125. Since January 1, 2007, 10,000 shares have been outstanding; 20,000 shares are authorized.
    3. Common stock is no-par with a stated value of $5 per share; 600,000 shares are authorized.
    4. The January 1 balance in Retained Earnings was $2,450,000.
    5. On October 1, 100,000 shares of common stock were sold for cash at $8 per share.
    6. A cash dividend of $600,000 was declared and properly allocated to preferred and common stock on November 1. No dividends were paid to preferred stockholders in 2007.
    7. On December 31, a 10% common stock dividend was declared out of retained earnings on common stock when the market price per share was $7.
    8. Net income for the year was $795,000.
    9. On December 31, 2008, the directors authorized disclosure of a $100,000 restriction of retained earnings for plant expansion.

    (a) Reproduce the Retained Earnings account (T-account) for the year.
    (b) Prepare a retained earnings statement for the year.
    (c) Prepare a stockholders' equity section at December 31.
    (d) Compute the earnings per share of common stock using 325,000 as the weighted average shares outstanding for the year.
    (e) Compute the allocation of the cash dividend to preferred and common stock.

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    Solution Summary

    This solution shows how to prepare a retained earnings statement and a stockholders equity section shown in a partial balance sheet and how to compute earnings per share. This solution is presented in an attached Word document.