FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Chapter 11, Problem 4AP

1.

To determine

Compute the amount of dividends, in total and per share, that would be payable to each class of stockholder’s for each case.

1.

Expert Solution
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Explanation of Solution

Preferred stock:

The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Common stock:

These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Retained earnings:

Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

Cash dividends:

The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

Compute the amount of dividends, in total and per share, that would be payable to each class of stockholder’s for each case:

Case A: Preferred is noncumulative and the total amount of all dividends is $25,000.

Particulars

Preferred Stock of 21,000 shares

(Amount in $)

Common Stock

of 500,000 shares

(Amount in $)

Total

(Amount in $)

Preferred shares ($210,000×8%)16,800 16,800
Balance carried to common stock  (1)8,2008,200
 16,8008,20025,000
Per share value (2) 0.80(3) 0.016 

(Table 1)

Working Notes:

Balance carried to common stock = (Total amount of all dividends Preferred shares)=$25,000$16,800=$8,200 (1)

Per share value of perferred stock of 21,000 shares} = DividendPerferredstock=$16,80021,000 Shares=0.80 (2)

Per share value of common stock of 500,000 shares} = DividendCommon stock=$8,200500,000 Shares=0.016 (3)

Case B: Preferred is cumulative and the total amount of all dividends is $25,000.

Particulars

Preferred Stock of 21,000 shares

(Amount in $)

Common Stock

of 500,000 shares

(Amount in $)

Total

(Amount in $)

Preferred shares: 
Arrears ($210,000×8%×2years=$33,600)25,000 025,000
 Current year ($210,000×8%)000
 25,000025,000
Per share value (4) 1.190 

(Table 2)

Working Notes:

Per share value of perferred stock of 21,000 shares} = DividendPerferredstock=$25,00021,000 Shares=1.19 (4)

Case C: Preferred is cumulative and the total amount of all dividends is $75,000.

Particulars

Preferred Stock of 8,000 shares

(Amount in $)

Common Stock

of 35,000 shares

(Amount in $)

Total

(Amount in $)

Preferred shares: 
Arrears ($210,000×8%×2years)33,600 033,600
 Current year ($210,000×8%)16,800016,800
Balance of common stock024,60024,600
 50,400(5) 24,60075,000
Per share value (6) 2.40(7)0.049 

(Table 3)

Working Notes:

Balance carried to common stock = (Total amount of all dividends Preferred shares arrearsPreferred shares current year)=($75,000$33,600$16,800)=$24,600 (5)

Per share value of preferred stock of 21,000 shares} = DividendPreferred stock=$50,40021,000 Shares=2.40 (6)

Per share value of common stock of 500,000 shares} = Dividendcommon stock=$24,600500,000 Shares=0.049 (7)

2.

To determine

Explain the manner by which stock dividend will be compared to case C if company issues a 40% common stock dividend on the outstanding shares and if  the market value per share is $50.

2.

Expert Solution
Check Mark

Explanation of Solution

Schedule of Comparative Differences
ItemAmount of Dollar Increase (Decrease)
Cash Dividend – Case CStock Dividend
AssetsThere is a decrease in the value of cash by $75,000.No change
LiabilitiesThe liabilities increase by $75,000 when cash dividend is declared and it decreases during the payment of cash dividend.No change
Stockholders’ equityRetained earnings of the company reduce by $75,000.

Stockholder’s equity will not change on declaration of stock dividend.

The retained value gets reduced due to declaration of dividend and there will be equal increase in the value of common stock $200,000 (500,000×40%×$1).

(Table 4)

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Chapter 11 Solutions

FINANCIAL ACCOUNTING

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