Accounting 2 - Chapter 14 - Notes - Miu

Final revision Accounting 2 – chapter 14 Corporations Dividends
Allocating Cash Dividends between Preferred and Common Stock:
Preferred stockholders must be paid first to preferred stockholders before any common stockholders are paid.
Cumulative: dividends in arrears + current year dividend must be paid to PS before paying any dividends to CS.
NOT cumulative: Only current year’s dividend must be paid to PS before paying remaining dividends to CS.
Example Wharton corporation was organized on January 1, 2011. During its first year, the corporation issued 25,000
shares of $40 par value preferred stock and 200,000 shares of $5 par value common stock. At December 31, the company
declared the following cash dividends:
December 2011 $65,000

December 2012 100,000
December 2013 150,000
1. Show the allocation of dividends to each class of stock, assuming that the preferred stock is %8 and not cumulative.
2. Show the allocation of dividends to each class of stock, assuming the he preferred stock is %7 and cumulative.
Answer 2011 2012 2013

1) Total Dividends 65,000 100,000 150,000
Allocation to PS (8%X40X25,000) = 80,000 65,000 80,000 80,000
Allocation to CS 0 20,000 70,000
2) Total Dividends 65,000 100,000 150,000
Allocation to PS (7%X40X25,000) = 70,000 65,000 75,000 (70 + 5) 70,000
Allocation to CS 0 25,000 80,000
Three important dates are important in connection with dividends:
• Declaration date: on the declaration date, the board of directors declares a cash dividend and a liability is recorded.
• Record date: The record date marks the time when ownership of outstanding shares is determined from the records
maintained by the corporation. No entry is required on this date.
• Payment date: the payment of the dividend is recorded.
Cash Dividend Example: Assume that on December 1, 2005, the directors of Media General declare a 50 cent per share cash
dividend on 100,000 shares of $10 par value common stock. On Jan 20, 2006, dividends were paid.
Date Account Title and Explanation Dr. Cr.

Dec. 1 Retained Earnings (100,000 shares × $0.50 = $50,000) 50,000
(declaration date) Dividends Payable 50,000
Jan. 20 Dividends Payable 50,000
(payment date) Cash 50,000
Types of Stock Dividends:
• SMALL stock dividend: less than 20-25% of the corporation’s issued stock. Use fair market value to calculate Retained
earnings.
• LARGE stock dividend: more than 20-25% of the corporation’s issued stock. Use par value to calculate Retained earnings.
Mr. Ahmad Mashaly 1

Example: Assume that Midland Corporation has a balance of $300,000 in retained earnings and declares a 10% stock
dividend on its 50,000 shares of $10 par value common stock. The current fair value of its stock is $15 per share.
Date Account Dr. Cr.
Retained Earnings (50,000 × 10% × $15 fair market value) 75000
Common Stock Dividends Distributable (50,000 × 10% × $10 par value) 50000
Paid-in capital in Excess of Par Value (75000 - 50000) 25000
Common Stock Dividends Distributable 50000
Common Stock 50000
Show the changes in stockholder’s equity section after stock dividend distribution:
Stockholders’ Equity Before Dividend After Dividend
Paid-in capital
Common stock, $10 par $500,000 $550,000
Paid-in capital in excess of par 0 25,000
Total paid-in capital $500,000 $575,000
Retained Earnings 300,000 225,000
Total stockholders’ equity $800,000 $800,000
Outstanding shares 50,000 55,000
Book value per share $16.00 $14.55
Retained Earnings statement:
Beg. Retained Earnings
Add: Net Income
Less: Dividends
Cash dividends – C/S
Stock Dividends – C/S
= Ending Retained Earnings
Mr. Ahmad Mashaly 2

Accounting 2 Ch. 14 Review Problems
Problem (1): (Cash and Stock Dividends)
Western Corporation had retained earnings at January 1, 2012, of $750,000. Western Corporation had 300,000
shares of $2 par value common stock outstanding throughout 2012. Net income for 2012 was $320,000. The
following transactions occurred during 2012:
July 1 A cash dividend of $0.25 per share was declared to stockholders of record on July 15.
Aug. 1 Paid the cash dividends.
Nov. 1 A 5% stock dividends was declared. The market price at declaration date was $6 per share.
Dec. 15 Distributed the stock dividends shares.
Required:
1. Journalize the 2012 dividends transactions.

2. Prepare a retained earnings statement for 2012.
Problem (2): (Allocation of Cash Dividends to Preferred and Common Stock)
Kress Corporation was organized on January 1, 2010. During its first year, the corporation issued 30,000
shares of $40 par value preferred stock and 200,000 shares of $5 par value common stock. At December 31, the
company declared the following cash dividends:
December 2010 $80,000
December 2011 124,000
December 2012 176,000
Required:
1. Show the allocation of dividends to each class of stock, assuming that the preferred stock is 7% and not
cumulative.
2. Show the allocation of dividends to each class of stock, assuming that the preferred stock is 8% and
cumulative.
Mr. Ahmad Mashaly 3

Accounting 2 Ch. 14 Review Problems Answers
Problem 1
July 1 Retained Earnings ($0.25 X 300,000) 75,000

Dividends Payable 75,000
Aug 1 Dividends Payable 75,000
Cash 75,000
Nov 1 Retained Earnings (5% X 300,000 X $$6) 90,000
C/S distributable (5% X 300,000 X $2) 30,000
Paid in Capital in excess of C/S par value 60,000
Dec 15 C/s distributable 30,000
Common Stocks 30,000
Retained Earnings statement:
Beg. Retained Earnings 750,000
Add: Net Income 320,000
Less: Dividends
Cash dividends – C/S 75,000
Stock Dividends – C/S 90,000 (165,000)
Ending Retained Earnings 905,000
Problem 2
2010 2011 2012

3) Total Dividends 80,000 124,000 176,000
Allocation to P/S (7%X40X30,000) 80,000 84,000 84,000
Allocation to C/S 0 40,000 92,000
4) Total Dividends 80,000 124,000 176,000

Allocation to P/S (8%X40X30,000) 80,000 112,000 (96 + 16) 96,000
Allocation to C/S 0 12,000 80,000
Mr. Ahmad Mashaly 4

Accounting 2 - Chapter 14 - Notes - Miu

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Final revision Accounting 2 – chapter 14 Corporations Dividends

Allocating Cash Dividends between Preferred and Common Stock:

December 2011 $65,000

Answer 2011 2012 2013

Three important dates are important in connection with dividends:

• Payment date: the payment of the dividend is recorded.

Date Account Title and Explanation Dr. Cr.

Types of Stock Dividends:

Mr. Ahmad Mashaly 1

Date Account Dr. Cr.

Retained Earnings (50,000 × 10% × $15 fair market value) 75000

Paid-in capital in Excess of Par Value (75000 - 50000) 25000

Common Stock Dividends Distributable 50000

Common Stock 50000

Stockholders’ Equity Before Dividend After Dividend

Common stock, $10 par $500,000 $550,000

Paid-in capital in excess of par 0 25,000

Total paid-in capital $500,000 $575,000

Retained Earnings 300,000 225,000

Total stockholders’ equity $800,000 $800,000

Outstanding shares 50,000 55,000

Book value per share $16.00 $14.55

Retained Earnings statement:

Beg. Retained Earnings

Add: Net Income

Cash dividends – C/S

Stock Dividends – C/S

= Ending Retained Earnings

Mr. Ahmad Mashaly 2

Accounting 2 Ch. 14 Review Problems

Problem (1): (Cash and Stock Dividends)

Aug. 1 Paid the cash dividends.

Dec. 15 Distributed the stock dividends shares.

1. Journalize the 2012 dividends transactions.

Problem (2): (Allocation of Cash Dividends to Preferred and Common Stock)

December 2010 $80,000

December 2011 124,000

December 2012 176,000

Mr. Ahmad Mashaly 3

Accounting 2 Ch. 14 Review Problems Answers

July 1 Retained Earnings ($0.25 X 300,000) 75,000

Retained Earnings statement:

Beg. Retained Earnings 750,000

Add: Net Income 320,000

Cash dividends – C/S 75,000

Stock Dividends – C/S 90,000 (165,000)

Ending Retained Earnings 905,000

2010 2011 2012

4) Total Dividends 80,000 124,000 176,000

Mr. Ahmad Mashaly 4

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