Annora Inc., a private company, is authorized to issue an unlimited number of common shares and 100,000 noncumulative $4 preferred shares. It began operations on January 1, 2021, and the following are selected transactions during 2021:

Jan. 1 Issued 300,000 common shares for $150,000 cash.

2 Issued 30,000 preferred shares for $40 cash per share.

Dec. 1 Declared a total of $225,000 in dividends, payable on January 5, to shareholders of record on December 13.

31 Determined that it had total revenues of $915,000 and operating expenses of $610,000. Annora elected to report under ASPE. It has a 15% income tax rate and paid income tax instalments during the year of $40,000.

Instructions

a. Record the share issue and dividend transactions.

b. Prepare a partial income statement starting with profi t before income tax and record the adjusting entry for income tax.

c. Prepare a statement of retained earnings and the shareholders’ equity section of the balance sheet.

Taking It Further

Why are common shareholders sometimes referred to as “residual owners”?