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Chapter 15: Question 21Q (page 774)
Dividends are sometimes said to have been paid 鈥渙ut of retained earnings.鈥� What is the error, if any, in that statement?
Here the statement contains an error as the retained earning does not give surety for a dividend payment.
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What are the principal considerations of a board of directors in making decisions involving dividend declarations? Discuss briefly.
(Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders鈥� equity.
Instructions
In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code: I = Increase, D = Decrease, NE = No effect.
Item | Asset | Liabilities | Stockholders鈥� Equity | Paid-in Capital | Retained Earnings | Net Income |
(Equity Transactions and Statement Preparation) On January 5, 2017, Phelps Corporation received a charter granting the right to issue 5,000 shares of \(100 par value, 8% cumulative and nonparticipating preferred stock, and 50,000 shares of \)10 par value common stock. It then completed these transactions.
Jan. 11 Issued 20,000 shares of common stock at \(16 per share.
Feb. 1 Issued to Sanchez Corp. 4,000 shares of preferred stock for the
following assets: equipment with a fair value of \)50,000; a factory
building with a fair value of \(160,000; and land with an
appraised value of \)270,000.
July 29 Purchased 1,800 shares of common stock at \(17 per share. (Use cost
method.)
Aug. 10 Sold the 1,800 treasury shares at \)14 per share.
Dec. 31 Declared a \(0.25 per share cash dividend on the common stock and
declared the preferred dividend.
Dec. 31 Closed the Income Summary account. There was a \)175,700 net
income.
Instructions
(Preferred Dividends) The outstanding capital stock of Edna Millay Corporation consists of 2,000 shares of \(100 par value, 8% preferred, and 5,000 shares of \)50 par value common.
Instructions
Assuming that the company has retained earnings of $90,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.
(Stockholders鈥� Equity Section) Bruno Corporation鈥檚 post-closing trial balance at December 31, 2017, is shown as follows.
BRUNO CORPORATION POST-CLOSING TRIAL BALANCE DECEMBER 31, 2017 | ||
Dr. | Cr. | |
Accounts payable | \( 310,000 | |
Accounts receivable | \) 480,000 | |
Accumulated depreciation鈥攂uildings | 185,000 | |
Additional paid-in capital in excess | ||
of par鈥攃ommon | 1,300,000 | |
From treasury stock | 160,000 | |
Allowance for doubtful accounts | 30,000 | |
Bonds payable | 300,000 | |
Buildings | 1,450,000 | |
Cash | 190,000 | |
Common stock (\(1 par) | 200,000 | |
Dividends payable (preferred stock鈥攃ash) | 4,000 | |
Inventory | 560,000 | |
Land | 400,000 | |
Preferred stock (\)50 par) | 500,000 | |
Prepaid expenses | 40,000 | |
Retained earnings | 301,000 | |
Treasury stock (common at cost) | 170,000 | |
Totals | \(3,290,000 | \)3,290,000 |
At December 31, 2017, Bruno had the following number of common and preferred shares. | ||
Common | Preferred | |
Authorized | 600,000 | 60,000 |
Issued | 200,000 | 10,000 |
Outstanding | 190,000 | 10,000 |
The dividends on preferred stock are \(4 cumulative. In addition, the preferred stock has a preference in liquidation of \)50 per share.
Instructions
Prepare the stockholders鈥� equity section of Bruno鈥檚 balance sheet at December 31, 2017.
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