The stockholders' equity accounts of Fernandez, Inc., at January 1, 2010, 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 2010, 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 2009 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, 2011.
31 Determined that net income for the year was $320,000.
Instructions
With the class divided into groups, answer the following questions.
(a) Prepare a retained earnings statement for the year. There are no preferred dividends in arrears.
(b) Discuss why the overstatement of 2009 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.