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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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(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.
Discuss the propriety of showing:
(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.
The books of Conchita Corporation carried the following account balances as of December 31, 2017.
Cash \( 195,000
Preferred Stock (6% cumulative, nonparticipating, \)50 par) 300,000
Common Stock (no-par value, 300,000 shares issued) 1,500,000
Paid-in Capital in Excess of Par鈥擯referred Stock 150,000
Treasury Stock (common 2,800 shares at cost) 33,600
Retained Earnings 105,000
The company decided not to pay any dividends in 2017.
The board of directors, at their annual meeting on December 21, 2018, declared the following: 鈥淭he current year dividends shall be 6% on the preferred and \(.30 per share on the common. The dividends in arrears shall be paid by issuing 1,500 shares of treasury stock.鈥� At the date of declaration, the preferred is selling at \)80 per share, and the common at \(12 per share. Net income for 2018 is estimated at \)77,000.
Instructions
a) Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously.
b) Could Conchita Corporation give the preferred stockholders 2 years鈥� dividends and common stockholders a 30 cents per share dividend, all in cash?
What factors influence the dividend policy of a company?
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