William Bost organized Frontier Western Wear, Inc., early in 2010. On January 15, the corporation issued to Bost and other investors 40,000 shares of capital stock at $20 per share.
After the revenue and expense accounts (except Income Tax Expense) were closed into the Income Summary account at the end of 2010, the account showed a before-tax profit of $120,000.
The income tax rate for the corporation is 40 percent. No dividends were declared during the year.
On March 15, 2011, the board of directors declared a cash dividend of 50 cents per share, payable on April 15.
a. Prepare the journal entries for 2010 to (1) record the issuance of the common stock, (2) record the income tax liability at December 31, and (3) close the Income Tax Expense account.
b. Prepare the journal entries in 2011 for the declaration of the dividend on March 15 and payment of the dividend on April 15.
c. Operations in 2011 resulted in an $18,000 net loss. Prepare the journal entries to close the Income Summary and Dividends accounts at December 31, 2011.
d. Prepare the stockholders’ equity section of the balance sheet at December 31, 2011. Include a separate supporting schedule showing your determination of retained earnings at that date.