Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 11, Problem 8P

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 $31,000.

Particulars

Preferred Stock of 8,000 shares

(Amount in $)

Common Stock

of 35,000 shares

(Amount in $)

Total

(Amount in $)

Preferred shares ($120,000×10%)12,000 12,000
Balance carried to common stock   (1)19,00019,000
 12,00019,00031,000
Dividend per share (2) 1.50(3) 0.54 

(Table 1)

Working Notes:

Calculate the balance dividend amount carried to common stock.

Balance carried to common stock = (Total amount of all dividends Preferred shares dividend)=$31,000$12,000=$19,000 (1)

Calculate the amount of dividend per share for preferred stock.

Dividend per share of perferred stock of 8,000 shares} = DividendPerferredstock=$12,0008,000 Shares=$1.50 (2)

Calculate the amount of dividend per share for common stock.

Dividend per share of common stock of 35,000 shares} = DividendCommon stock=$19,00035,000 Shares=$0.54 (3)

Case B: Preferred is cumulative and the total amount of all dividends is $35,000.

Particulars

Preferred Stock of 8,000 shares

(Amount in $)

Common Stock

of 35,000 shares

(Amount in $)

Total

(Amount in $)

Preferred shares: 
Arrears ($120,000×10%×2years)24,000 024,000
 Current year ($120,000×10%) or ($35,00024,000) whichever is less11,00001000
 35,000035,000
Per share value (4) 4.3750 

(Table 2)

Working Note:

Calculate the amount of dividend per share for preferred stock.

Dividend per share of perferred stock of 8,000 shares} = DividendPerferredstock=$35,0008,000 Shares=4.375 (4)

Case C: Preferred is cumulative and the total amount of all dividends is $90,000.

Particulars

Preferred Stock of 8,000 shares

(Amount in $)

Common Stock

of 35,000 shares

(Amount in $)

Total

(Amount in $)

Preferred shares: 
Arrears ($120,000×10%×2years)24,000 024,000
 Current year ($120,000×10%)12,000012,000
Balance of common stock054,00054,000
 36,000(5) 54,00090,000
Per share value (6) 4.50(7)1.54 

(Table 3)

Working Notes:

Calculate the balance dividend amount carried to common stock.

Balance carried to common stock = (Total amount of all dividends Preferred shares dividend)=$90,000$36,000=$54,000 (5)

Calculate the amount of dividend per share for preferred stock.

Dividend per share of perferred stock of 8,000 shares} = DividendPerferredstock=$36,0008,000 Shares=4.5 (6)

Calculate the amount of dividend per share for common stock.

Dividend per share of common stock of 35,000 shares} = DividendCommon stock=$54,00035,000 Shares=1.54 (7)

2.

To determine

Explain the manner by which stock dividend will be compared to case C if company issues a 30% common stock dividend on the outstanding shares and if  the market value per share is $24.

2.

Expert Solution
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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 $90,000.No change
LiabilitiesThe liabilities increase by $90,000 when cash dividend is declared and it decreases during the payment of cash dividend.No change
Stockholders’ equityRetained earnings of the company reduce by $90,000.

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 $84,000 (35,000×30%×$8).

(Table 4)

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Chapter 11 Solutions

Financial Accounting, 8th Edition

Ch. 11 - What are the two basic requirements to support the...Ch. 11 - Prob. 12QCh. 11 - Prob. 13QCh. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - Prob. 16QCh. 11 - Prob. 1MCQCh. 11 - Prob. 2MCQCh. 11 - Prob. 3MCQCh. 11 - Prob. 4MCQCh. 11 - Prob. 5MCQCh. 11 - Prob. 6MCQCh. 11 - Prob. 7MCQCh. 11 - Which statement regarding dividends is false? a....Ch. 11 - Prob. 9MCQCh. 11 - Prob. 10MCQCh. 11 - Prob. 1MECh. 11 - Prob. 2MECh. 11 - Prob. 3MECh. 11 - Prob. 4MECh. 11 - Determining the Effects of Treasury Stock...Ch. 11 - Determining the Amount of a Dividend Cole Company...Ch. 11 - Prob. 7MECh. 11 - Prob. 8MECh. 11 - Prob. 9MECh. 11 - Prob. 10MECh. 11 - Prob. 1ECh. 11 - Prob. 2ECh. 11 - Prob. 3ECh. 11 - Prob. 4ECh. 11 - Prob. 5ECh. 11 - Prob. 6ECh. 11 - Prob. 7ECh. 11 - Prob. 8ECh. 11 - Prob. 9ECh. 11 - Prob. 10ECh. 11 - Prob. 11ECh. 11 - Prob. 12ECh. 11 - Prob. 13ECh. 11 - Prob. 14ECh. 11 - Prob. 15ECh. 11 - Prob. 16ECh. 11 - Prob. 17ECh. 11 - Prob. 18ECh. 11 - Prob. 19ECh. 11 - Prob. 20ECh. 11 - Prob. 21ECh. 11 - Prob. 22ECh. 11 - Prob. 23ECh. 11 - Prob. 24ECh. 11 - Prob. 25ECh. 11 - Prob. 1PCh. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Prob. 12PCh. 11 - Prob. 1APCh. 11 - Prob. 2APCh. 11 - Prob. 3APCh. 11 - Prob. 4APCh. 11 - Prob. 1ACOMPCh. 11 - Prob. 1BCOMPCh. 11 - Prob. 1CCOMPCh. 11 - Prob. 1DCOMPCh. 11 - Prob. 1CPCh. 11 - Prob. 2CPCh. 11 - Prob. 3CPCh. 11 - Prob. 4CPCh. 11 - Prob. 5CPCh. 11 - Prob. 6CPCh. 11 - Prob. 1CC
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