Accounting Procedures for Stockholders Equity by wuc12925

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									Intermediate Financial

Shareholders' Equity-
 Retained Earnings
         by Professor Hsieh
Objectives of the Chapter
   To discuss the content of retained
   To study the accounting treatments for
    dividends (including cash dividend,
    property dividend, scrip dividend, and
    stock dividend).
   To learn the procedures for quasi-
                   Stockholders' Equity (2)- Retained Earnings   2
Content of Retained Earnings
    Stockholders’ equity consists of
     primarily stockholders’ investments
     (i.e., contributed capital) and retained

    The primary factors that affect retained
     earnings besides net income (or net
     loss) include (1) dividends, (2) prior
     period adjustments, (3) appropriations,
     and (4) quasi-reorganizations.
                    Stockholders' Equity (2)- Retained Earnings   3
    While the net income increases the
     retained earnings, the distribution of
     dividends reduces the retained
    In order to declare dividends, a
     company must meet legal
     requirements and have assets
     available for distribution.

                   Stockholders' Equity (2)- Retained Earnings   4
Dividends (contd.)
    Most companies regard the unrestricted
     retained earnings as the limit for
     dividends distribution.
    However, most states allow liquidating
     dividends (i.e., dividends pay out of
     contributed capital).*
    *Note: as long as the total assets after dividends equal
     or exceed the sum of total liabilities and the amount
     needed to satisfy the rights of other classes of
     shareholders with higher priority in receiving assts at
     liquidation (Revised Model Business Corporation Act,
                          Stockholders' Equity (2)- Retained Earnings   5
Dividends (contd.)

 Restrictions of retained earnings include:
 1) Legal restrictions: Many states require
  a corporation to restrict the cost of
  treasury stock from dividends distribution.
 2)Contractual restrictions: A long-term
  bond contract may limit the use of assets
  for payment of dividends as a loan
  condition, and therefore, restrict the use
  of retained earnings for dividends.
                  Stockholders' Equity (2)- Retained Earnings   6
 Restrictions (contd.)
 3)Voluntary restrictions: Appropriation
 of retained earnings for specific
  The board of directors is responsible

   for the establishment of dividend
   policy and the determination of the
   amount, timing and types of
   dividends to be declared.
                Stockholders' Equity (2)- Retained Earnings   7
    A few types of dividends may be
     considered: (1) cash, (2) property,
     (3) scrip, (4) stock, and (5)
     liquidating dividends.
    Cash, property and scrip dividends
     decrease retained earnings (R/E)
     and the stockholders’ equity.

                  Stockholders' Equity (2)- Retained Earnings   8
    Stock dividend decreases R/E but
     increases contributed capital in the
     same amount. So, there is no
     change in the total stockholders’
    Liquidating dividend decreases both
     contributed capital and the
     stockholders' equity.

                  Stockholders' Equity (2)- Retained Earnings   9
Cash Dividends
    A cash dividend is the most common
     type of dividend.

    Four days are relevant to the cash
     dividend: 1) the date of declaration,
     2) the ex-dividend date, 3) the date
     of record, and 4) the date of

                   Stockholders' Equity (2)- Retained Earnings   10
Cash Dividends:(contd.)
    Example: on Nov. 3, 20x5, the board of
     directors declares preferred dividends
     totaled $10,000 and common dividends
     totaled $20,000.
    These dividends are payable on 12/15/x5
     to stockholders of record on 11/24/x5. In
     addition, the ex-dividend date is 11/20/x5.
     The journal entries for the declaration and
     other related events are:

                    Stockholders' Equity (2)- Retained Earnings   11
Cash Dividends:(contd.)
  11/3/x5 the date of declaration
 Retained Earnings           30,000
    Dividends Payable: CS        20,000
    Dividends Payable: PS        10,000
  Shares are traded with dividends
   attached after this date.
  Companies are legally liable for
   declared dividends on this date.

                Stockholders' Equity (2)- Retained Earnings   12
Cash Dividends:(contd.)
    11/20/x5 Ex-dividend date.
     No entry or memo. It is usually 4
     business dates prior to the date of
    Shares purchased on or after this date
     are purchased ex dividend-without the
     right to receive the declared dividend.
    Therefore, a decline in price equals the
     dividend declared in general occurs on
     this date.
                   Stockholders' Equity (2)- Retained Earnings   13
Cash Dividends:(contd.)
  11/24/x5 The date of record
 Memo: the company will pay dividends
   on 12/15/x5 to preferred and common
   stockholders of record as of today, the
   date of record.
  Stockholders on the record will be paid
   of dividend even if they sell those
   shares prior to 12/15/x5, the payment

                Stockholders' Equity (2)- Retained Earnings   14
Cash Dividends:(contd.)
    12/15/x5 Dividend payment date

     Div. Payable: Com. stk 20,000
     Div. Payable: Prefer.stk 10,000
               Cash                30,000

                  Stockholders' Equity (2)- Retained Earnings   15
Preferred Stock Characteristics
   Preferred stockholders have a
    preference to dividends.
   A preference to dividends does not
    guarantee a dividend distribution.
   Because a dividend declaration is at
    the discretion of the board of directors.

                   Stockholders' Equity (2)- Retained Earnings   16
Preferred Stock Characteristics
   If a corporation fails to declare a
    dividend, or declares a dividend which
    is less than the stated rate of the
    preferred stock, the "passed" dividend
    of non-cumulative preferred stock will
    never be paid.

                  Stockholders' Equity (2)- Retained Earnings   17
Cumulative Preferred Stock
   For cumulative preferred stock, the
    amount of passed dividend becomes
    "dividend in arrears”.
   The “dividend in arrears” has the highest
    priority to be paid in the following periods.
    Common stockholders cannot be paid
    any dividend until the preferred dividend
    in arrears has been paid.

                     Stockholders' Equity (2)- Retained Earnings   18
Cumulative Preferred Stock
   Dividend in arrears accumulate from
    period to period.
   The “dividend in arrears” is not a liability
    because no liability exists until the
    dividend declaration.

                    Stockholders' Equity (2)- Retained Earnings   19
                  Cumulative Preferred Stock
Year 1: Case I:
Dividends declared = $10,000
Com. STK shares outstanding: 10,000, @$5
Preferred STK outstanding : 5,000, @$10,
 dividend is 6% of the par value
Dividends for P.S. = 6% *10*5,000= $3,000.
Dividends for C.S. = ($10,000-3,000)=$7,000.
 Or $0.7 per share ($7,000/10,000 shares)
                  Stockholders' Equity (2)- Retained Earnings   20
                    Cumulative Preferred Stock
Examples (contd.)
Case II: Same information as in Case I except
that dividends declared = $1,000.
Dividends for P.S. = $1,000.

           Div. Passed=$2,000
Dividends for C.S. = $0

If this is a cumulative P.S. the dividends in
arrears equal $2,000 ($3,000-1,000).
If this is a non-cumulative P.S., the $2,000 will
never been paid.
                    Stockholders' Equity (2)- Retained Earnings   21
             Cumulative Preferred Stock
Examples (contd.)
Year 2: Continued from Case II of year 1,
  assuming a cumulative preferred stock and
  the dividends declared = $8,000.
Dividends for P.S. => $2,000 (div. In arrears)
                      $3,000 (div. Of year 2)
                     $ 5,000
Dividends for C.S. => $8,000- $2,000-3,000 =

                   Stockholders' Equity (2)- Retained Earnings   22
Participating Preferred Stock
   When preferred stock is participating,
    preferred stockholders share with the
    common stockholders in any "extra"
   "Extra" dividends = the declared
    dividends - the stated dividends of
    preferred stock - Equal % of dividends
    as the preferred stock's stated
    dividends for common stock.
                   Stockholders' Equity (2)- Retained Earnings   23
Participating Preferred Stock
   Fully participating preferred stock:
    preferred stockholders share equally
    with the common stockholders in any
    "extra" dividends.

   These extra dividends are distributed
    proportionally, based on the respective
    par value of each class of stock.

                   Stockholders' Equity (2)- Retained Earnings   24
Participating Preferred Stock
   Partially participating preferred stock:
    preferred stockholders share in "extra"
    dividends with common stockholders,
    but its participation is limited to a fixed
    rate or amount per share.

                     Stockholders' Equity (2)- Retained Earnings   25
Allocation of Declared Dividends
   If the preferred stock is Not participating,
    the amount of dividends received by the
    common stockholders equals:
    the declared dividends - any "dividend in
    arrears" - the stated dividend of the
    preferred stock
   If the preferred stock is participating in
    extra dividends, calculation needs to be
    made for the allocation of dividends.
                     Stockholders' Equity (2)- Retained Earnings   26
Participating Preferred Stock :(contd.)
    Example: Assume a company issued 10%
     participating cumulative preferred stock with
     a total par value of $20,000 and common
     stock with a total par value of $30,000.
     Thus, preferred stock constitutes 40% and
     common stock 60% of the total par value.
     The company intends to distribute cash
     dividends of $9,000, and there are no
     dividends in arrears. The dividend
     distribution is as follows:

                     Stockholders' Equity (2)- Retained Earnings   27
Participating Preferred Stock :(contd.)
 (A) Preferred stock is fully participating:
                                                         Preferred         Common
 1. 10% dividend to preferred (on $20,000 par)           $2,000
 2. Common dividends (equal to 10% of par)                                 $3,000
 Extra dividend proportionate to par values:
 Total to allocate                $9,000
 Allocated (2,000 + 3,000)        (5,000)
 Extra Dividend (40% to preferred
 and 60% to common)               $4,000                 $1,600             2,400
 Dividends to each class of stock                        $3,600            $5,400

                             Stockholders' Equity (2)- Retained Earnings            28
Participating Preferred Stock :(contd.)
 (B) Preferred Stock Participates up to 12%:
                                           Preferred Common
 1. 10% dividend to preferred                $2,000
 2. Common div. (equal to 10%)                        3,000
 3. 2% div. On par of preferred (2% * 20,000) 400
 4. 2% div. On par of common (2% * 30,000)               600
 5. Remainder to common
  (9,000-2,000-3,000-400-600)                _____     3,000
 Dividends to each class of stock             2,400    6,600
  If any preferred stock dividends had been in
    arrears, the dividends in arrears would have been
    distributed before any participation calculations.
                       Stockholders' Equity (2)- Retained Earnings   29
Property Dividends
    A property dividend is that dividend is
     payable in assets other than cash.

    Marketable securities are typically used
     for a property dividend.

    Because they are more easily
     distributable to the stockholders.

                   Stockholders' Equity (2)- Retained Earnings   30
Property Dividends
    A property dividend is recorded at the
     fair market value of the asset
     transferred on the date of declaration.

    A gain or a loss is recognized (APB
     opinion no. 29, par. 18).

                   Stockholders' Equity (2)- Retained Earnings   31
Property Dividends :(contd.)
   Examples:
 (A)Property dividend is an investment in debt held
    to maturity:
     Corp. Aron declares a property dividend,
     payable in bonds of Rock company
     being held to maturity. The bonds are
     carried on Aron’s book at a book value of
     $40,000 but the current market value on
     the declaration date is $48,000. The
     journal entries to record the property
     dividend are as follows:
                     Stockholders' Equity (2)- Retained Earnings   32
Property Dividends :(contd.)
 Date of Declaration
 1. Investments in Rock Company Bond                                 8,000
       Gain on Disposal of Investment                                   8,000
 2. Retained Earnings              48,000
     Property Dividends Payable         48,000
 Date of Payment
 Property Dividends Payable             48,000
     Investment in Rock Company Bonds        48,000

                       Stockholders' Equity (2)- Retained Earnings          33
Property Dividends :(contd.)
 (B) Property dividend is an investment in equity
    securities “available for sale”:

   The Remley company declares a
   property dividend on 3/15/x5, Payable in
   Welch company stock. The Welch stock
   had been purchased early in 20x4 for
   $24,000 and was reported as an asset at
   a fair value of $29,000 on 12/31/x4
   balance sheet.
                     Stockholders' Equity (2)- Retained Earnings   34
Property Dividends :(contd.)
    The market value of Welch stock is $31,000 on
     3/15/x5. The following entries are made on
     3/15/x5 (the declaration date):
    Adj. prior to the recog. Of dividends payable:
     Fair Value Adjustment             2,000
         Unrealized holding gain             2,000
     Unrealized holding gain           7,000
           Gain on Disposal of Investment    7,000

                      Stockholders' Equity (2)- Retained Earnings   35
Property Dividends :(contd.)
 J.E. on the declaration date:
 Retained Earnings                                        31,000
      Property Dividends Payable                            31,000
 J.E. on the payment date:
 Property Dividends Payable                    31,000
       Investment in SAS                             24,000
       Fair value adjustment                           7,000

                     Stockholders' Equity (2)- Retained Earnings     36
Scrip Dividends
    A corporation with adequate retained
     earnings to meet legal dividend
     requirements but with insufficient funds
     to pay a current cash dividend may
     declare a scrip dividend.
    That is the corporation issues promissory
     notes (called “scrip”) requiring the Corp.
     to pay dividends at some future date.

                   Stockholders' Equity (2)- Retained Earnings   37
Scrip Dividends :(contd.)
    On the declaration date, the following entry will be
     Retained Earnings              xxx
       Dividends Payable (or Notes Pay.) xxx
    On the date of Payment:
     Dividends Payable         xxx
     Interest Expense          xxx
       Cash                              xxx
 * If the promissory notes are interest bearing

                       Stockholders' Equity (2)- Retained Earnings   38
Stock Dividends
    A stock dividend is a pro rata
     (proportional) distribution of additional
     shares of a corporations own stock to
     its shareholders.
    When a stock dividend is distributed,
     no corporate assets are distributed.
    Each stockholder maintain the same
     percentage of ownership as before.
    Stock dividend is similar to a stock
                   Stockholders' Equity (2)- Retained Earnings   39
Stock Dividends (contd.)
 Accounting treatment:
 a. Small stock dividend ( less than 25% of
    outstanding shares):
   the stock dividends are accounted for
   by transferring from retained earnings
   to contributed capital an amount
   equals to the fair market value of the
   additional shares issued.

                  Stockholders' Equity (2)- Retained Earnings   40
Stock Dividends :(contd.)
 b. A large stock dividend (no change in
   par value per share and is referred to
   as a stock split effected in the form of
   stock dividends):
   the accounting treatment is only to
   capitalize the par value of the stock,
   not the market value of the stock.
  For example, a 100% stock dividend is
   equivalent to a two-for-one stock split regards
   to its impact on stock price and share
   outstanding.       Stockholders' Equity (2)- Retained Earnings   41
Stock Dividends :(contd.)
    Example 1: Small Stock Dividend

     A Corporation with 20,000 shares
     outstanding declares and issues a
     10% stock dividend. On the date of
     declaration, the stock is selling for
     $23 per share with a par value of
     $10 per share. The journal entry to
     recorded the stock dividend is :

                    Stockholders' Equity (2)- Retained Earnings   42
Stock Dividends :(contd.)
    Date of Declaration:
     Retained Earnings       46,000
       C.S. To be Distributed **                               20,000
         Additional Paid-in Capital
         from Stock Dividend                                       26,000
    Date of Issuance:
     C.S. To be Distributed           20,000
       C.S. $10 par                                       20,000
 ** reported as a component of contributed capital.
                     Stockholders' Equity (2)- Retained Earnings            43
Stock Dividends :(contd.)
    Example 2: Large Stock Dividend
 Similar to example 1 except that the stock
 dividend increases from 10 % to 40% of the
 shares outstanding:
 Date Declaration:
 Additional paid in Capital* 80,000**
      C.S to be Distributed           80,000
     * An alternative account is retained earnings.
       If R/E is debited, the accounting standard
       does not prevent the capitalization of a larger
       amount per share.
                        Stockholders' Equity (2)- Retained Earnings   44
Stock Dividends :(contd.)
 ** $10*(40% *20,000 shares)
  Date of Issuance:
    C.S to be Distributed                     80,000
             C.S, $10 par                           80,000

    Reason of debiting paid-in capital
     rather than R/E for large stock
  to prevent transferring earned capital to
     invested capital.
                  Stockholders' Equity (2)- Retained Earnings   45
Fractional Shares
 A stock dividend or a stock split
  often results in some
  shareholders being entitled to
  fractions of whole shares
  (fractional shares).
 Cash payments (based on the
  fair value at declaration) are
  made to shareholders with
  fractional shares.
               Stockholders' Equity (2)- Retained Earnings   46
Liquidating Dividends
    Liquidating dividends are a return of
     contributed capital to stockholders rather
     than a distribution of earned capital (i.e.,
     R/E). This may occur in the case of
     insolvency and assetsa are distributed to

    The liquidating portion of the dividend is
     debited to Additional Paid-in Capital.
    a. assets which are not subject to a superior claim by
                         Stockholders' Equity (2)- Retained Earnings   47
Prior Period Adjustments
   Items reported as prior period
    adjustments of retained earnings
 a. certain change in accounting treatment
    (when a retroactive approach is used),
 b. a change in accounting entry, and
 c. corrections of errors of prior periods.

                 Stockholders' Equity (2)- Retained Earnings   48
Prior Period Adjustments
   Example: In 20x5, Fox Company
    discovered that it did not accrue
    $10,000 of interest expense for 20x4.
    The income tax effect is $3,000, the
    correct entries are:
 1. Retained Earnings          10,000
      Interest Payable             10,000
 2. Income Tax Refund Rece. 3,000
      Retained Earnings             3,000

                 Stockholders' Equity (2)- Retained Earnings   49
Prior Period Adjustments
(Restatements) :(contd.)
    Presentation on the Retained Earnings
     R/E, as previous reported Jan 1, 20x5 $102,400
     Less: Correction of overstatement in
     20x4 N/I due to interest expense
     understatement (Net of $3,000 I/T)      (7,000)
     Adjusted Retained Earnings,
     Jan 1, 20x5                             $95,400

                      Stockholders' Equity (2)- Retained Earnings   50
Appropriation of Retained Earnings
    An appropriation (or restriction) of
     retained earnings is that the board of
     directors has "earmarked" a portion for
     the retained earnings (the appropriated
     amount) for a designated purpose.

    This appropriated amount is not
     available for dividends.

                  Stockholders' Equity (2)- Retained Earnings   51
Appropiraion of Retained Earnings
 Reasons of appropriations: (1) to meet
  legal requirements, (2) to meet
  contractual restrictions,(3) a
  discretionary action of the board of
(1) Legal requirements: certain states
  require restrictions of R/E when
  treasury stock is acquired.

                Stockholders' Equity (2)- Retained Earnings   52
Appropiraion of Retained Earnings
 (2) Contractual agreement: due to issue
     of long-term bonds.
 (3) A discretionary action: based on the
     needs of the corporation.

 Example: Assume $2,000 of retained
    earnings is appropriated for treasury

                Stockholders' Equity (2)- Retained Earnings   53
             Appropiraion of Retained Earnings
 Retained Earnings                  2,000
     Retained Earnings:
     Appropriated for Treasury Stock      2,000
 After the treasury stock is reissued, the
  board of directors would cancel the
R/E Appropriated for Treasury stock 2,000
     Retained earnings                    2,000
                  Stockholders' Equity (2)- Retained Earnings   54
Other Component of Stockholder's
 Accumulated Other Comprehensive
   Other Comprehensive income
    accumulated over the current (reported
    in the combined income statement)
    and prior periods.
 a. Comprehensive income: changes in
    equity other than from owner related
    transactions (i.e., additional investment and
   dividends distribution).
                     Stockholders' Equity (2)- Retained Earnings   55
Other Component of Stockholder's
Equity (contd.)
  Comprehensive income includes:
 Net income
 Other Comprehensive Income (all net of
   Unrealized gain (loss) from SAS
   Foreign currency translation adjustments
   Minimum Pension liability adjustment
   Deferred gain (loss) from derivatives
                 Stockholders' Equity (2)- Retained Earnings   56
Example of Stockholders’ Equity and Statement
of Changes in Stockholders’ Equity
     Stockholders’ Equity December 31, 20x5
       Contributed capital:
        Common stock , $5 par (30,000 shares
       authorized, 11,400 shares issued, of which
       100 shares are being held treasury stock)                      57,000
        Additional paid-in capital on common stock                  197,400
        Additional paid-in capital from treasury stock                5,000
        Common stock option warrants                      14,600
        Less: Deferred compensation                      (11,000)     3,600
        Total Contributed capital                                   263,000
       Accumulated Other Comprehensive Income
       Unrealized gain from valuation of SAS                         40,000
       Retained earnings (see note)                                 386,200
        Total contributed capital, unrealized capital,
       and retained earnings                                        689,200
       Less: Treasury stock (at cost)                                (3,000)
        Total stockholders' equity                                  686,200

 Note: R/E are restricted regarding dividends in the amount
                            treasury Equity (2)-
 of $3,000, the cost of the Stockholders' stock. Retained Earnings             57
Example of Stockholders’ Equity and Statement
of Changes in Stockholders’ Equity: (Contd.)
    Statement of Changes in Stockholders’ Equity for
     Year Ended December 31, 20x5
                                                   Additional        Common                Accum.
                             Common Stock        Paid-in Capital      Stock                Other                  Treasury
                            Shares     Par     Common Treasury Option Deferred    Compre.             Retained     Stock
         Explanation        Issued    Value     Stock  Stock                       Income
                                                               Warrants Compensation                  Earnings     (Cost)
     Balances, 1/1/95        10,000   50,000   170,000       2,300    12,200     (8,400)     10,000   322,000       (7,500)
     Issued for cash          1,100    5,500    22,000
     Reissued treaury
     stock                                                    2700                                                  4,500
     Issued for exercise
     of stock options          300     1,500     5,400                  (900)
     expense for stock
     options                                                                       700
     Compensation cost
     for new stock
     options                                                           3,300     (3,300)

     Unrealized gain from
     valuation of SAS                                                                        30,000
     Net income                                                                                         97,000
     Cash dividends                                                                                    (32,800)
     Balances, 12/31/95      11,400   57,000   197,400       5,000    14,600    (11,000)     40,000   386,200       (3,000)

                                                  Stockholders' Equity (2)- Retained Earnings                                 58
   A quasi-reorganization is primarily an
    accounting procedure, that involves a
    revaluation of corporate assets and
    liabilities, and a realignment of the
    corporate capital structure to enable
    the corporation to have a “fresh start”
    toward financial solvency and

                  Stockholders' Equity (2)- Retained Earnings   59
Quasi-Reorganization :(contd.)
  The adjustment procedures are:
1. The Corp. reports to the stockholders
   with the restatements proposed and
   obtains the stockholders’ formal
2. The Corp. presents a B/S as of the
   date of readjustment in which the
   assets and liabilities are reported at
   their market values.

                Stockholders' Equity (2)- Retained Earnings   60
Quasi-Reorganization :(contd.)
  The adjustment procedures
3. Any amount written off is first charged
   against retained earnings and then
   against additional paid-in capital.
4. The Corp. begins its “fresh start” with a
   zero retained earnings balance.

                 Stockholders' Equity (2)- Retained Earnings   61
Quasi-Reorganization :(contd.)
   Specific Accounting procedures are:
1. A write-down of the assets to their market
   value, with the loss debited to R/E;
2. An increase of additional paid-in capital
   accomplished by a decrease in the par-
   value of the capital stock;
3. The elimination of the R/E deficit by a
   reduction of the additional paid-in capital.

                    Stockholders' Equity (2)- Retained Earnings   62
              Quasi-Reorganization :(contd.)
CMG Corp.'s property and equip. are
determined to have a combined market
value of $92,000 rather than the book value
of $140,000. Its Inventories and A/R are
overvalued by $8,000 and $4,000,
respectively. The board of directors, with
stockholders and the state's approval, has
authorized a reduction in par value of $6
per share. CMG has a deficit of $50,000
prior to the quasi-reorganization.
                 Stockholders' Equity (2)- Retained Earnings   63
                 Quasi-Reorganization :(contd.)
1. To write down the fixed assets to
   market value:
   Retained Earnings        48,000
       Accu. depreciation       48,000

2. To write down the current assets:
   Retained earnings        12,000
          Inventory                8,000
          Accounts Receivable      4,000
                Stockholders' Equity (2)- Retained Earnings   64
                     Quasi-Reorganization :(contd.)
3. To reduce the par value of stock
Common Stock, $10 par        150,000
     Common Stock, $4 Par        60,000
     Additional Paid-in Capital  90,000
4. To eliminate the R/E Deficit:
Additional Paid-in Capital 110,000
     Retained Earnings*           110,000
* 50,000 (the deficit) +48,000+12,000

                    Stockholders' Equity (2)- Retained Earnings   65
Condensed B/S of CMG Corp. before
the quasi-reorganization:
   CMG Corporation
    Balance Sheet December 31, 20x5
    Current assets    $ 30,000 Liabilities         $                 40,000
                                 Common stock,
                        200,000 $10 par
    Property and equipment                                         150,000
    Accumulated                  Additional paid -
    depreciation        (60,000) in capital                          30,000
                                 earnings Deficit)                  (50,000)
                                 Total liabilities
    Total assets      $ 170,000 equity             $               170,000
                            Stockholders' Equity (2)- Retained Earnings        66
Condensed B/S of CMG Corp.
immediately after the quasi-reorganization:
  CMG Corporation

  Balance Sheet December 31, 20x5
      Current assets      $    18,000 Liabilities                 $          40,000
      Property and                    Common stock,
      equipment               200,000 $4 par                                 60,000

      Less: Accumulated                 Additional paid -
      depreciation            (108,000) in capital                           10,000
                                        earnings (see
                                        note)                                    0
                                        Total liabilities
      Total assets        $    110,000 equity             $             110,000
                               Stockholders' Equity (2)- Retained Earnings            67
Condensed B/S of CMG Corp.
immediately after the quasi-
 Note: Retained earnings as of December
 31, 20x5 has a zero balance due to a
 quasi-reorganization on that date in
 which net assets were revalued, a deficit
 of $110,000 was charged against
 additional paid-in capital, and the par
 value of common stock was reduced
 from $10 to $4 per share.

                 Stockholders' Equity (2)- Retained Earnings   68

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