Nowell Inc. had the following stock issued and outstanding at January 1, Year 2.1. 150,000 shares of no-par common stock.2. 30,000 shares of $50 par, 4%, cumulative preferred stock. (dividends are in arrears for one year, Year 1,)On March 9, Year 1, Nowell declared a $175,000 cash dividend to be paid March 31 to shareholders of record on March 20.a. What amount of dividends will be paid to the preferred shareholders versus the common shareholders?b. Prepare the journal entries required for these transactions. (Be sure to include the dates of the entries.)

Question
Asked Nov 23, 2019
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Nowell Inc. had the following stock issued and outstanding at January 1, Year 2.

1. 150,000 shares of no-par common stock.

2. 30,000 shares of $50 par, 4%, cumulative preferred stock. (dividends are in arrears for one year, Year 1,)

On March 9, Year 1, Nowell declared a $175,000 cash dividend to be paid March 31 to shareholders of record on March 20.

a. What amount of dividends will be paid to the preferred shareholders versus the common shareholders?

b. Prepare the journal entries required for these transactions. (Be sure to include the dates of the entries.)

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Expert Answer

Step 1

The dividend paid to the preference holders is the product of the par value of preference capital, dividend percentage and the number of years of divided in arrears including the current year. The par value of preference capital is the product of the par value per share and the number of shares outstanding.

Shares outstanding x Par value x
Preferrence dividend =|
Dividend percentage x Number of years
= 30,000 shares x $50 x 4% x2 years
$120,000
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Shares outstanding x Par value x Preferrence dividend =| Dividend percentage x Number of years = 30,000 shares x $50 x 4% x2 years $120,000

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Step 2

The amount paid to the equity holders is the difference of the total dividend declared and the amount of dividend paid to the preference holders. The amount of dividend paid to the preference holders is $120,000 and the total dividend declared is $175,000.

Dividend declared - Preferrence dividend
Equity dividend
- $175,000-$120,000
- $55,000
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Dividend declared - Preferrence dividend Equity dividend - $175,000-$120,000 - $55,000

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Step 3

All the expenses is of debit nature when such expenses is incurred by the company. The divided expenses is incurred by the company and thus it is debited.

The dividend is declared by not paid by the company till date and this wi...

Accounts, Title & Explanation
Post ref. Debit(S)Credit(S)
$ 175,000
$ 120,000
Dates
9/March/Year 2 Dividend expenses
Dividend payable-Preferrence
Dividend payable-Equity
To record the declaration of
dividend)
$ 55,000
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Accounts, Title & Explanation Post ref. Debit(S)Credit(S) $ 175,000 $ 120,000 Dates 9/March/Year 2 Dividend expenses Dividend payable-Preferrence Dividend payable-Equity To record the declaration of dividend) $ 55,000

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