In: Accounting
Baur Company has 21,000 shares of $10 par value, 8% preferred stock and 500,000 shares of $1 par value common stock outstanding. As of December 31, 2018, it had $900,000 of Retained earnings. On December 31, 2018, the Board of Directors is considering the distribution of a cash dividend to the common and preferred stockholders. No dividends were declared in 2016 and 2017 and no dividends were in arrears prior to 2016. The company is considering the following options.
Option 1 The preferred stock is noncumulative and the dividend for 2018 would be $30,000.
Option 2 The preferred stock is cumulative and the dividends would be $30,000.
Option 3 The preferred stock is cumulative and the dividends would be $75,000.
Required: For each scenario, determine the dollar amount of dividends that would be paid to each class of stockholder.
Define the following as they pertain to dividend distribution: a. Date of declaration b. Date of record c. Date of payment
On which of these dates (date of declaration, date of record or date of payment) would a company NOT make a journal entry?
Following Details are given :
21000 shares, 8% Preferred Stock of $10 par value
5,00,000 shares , common stock of $1 par value
Now the Solution is :
Option 1: If the preferred stock is noncumulative and the dividend for 2018 would be $30,000 then total dividend of $30000 will be given to common stockholder as noncumulative preferred stock does not issue any omitted or unpaid dividends. This additional dividend is typically designed to be paid out only if the amount of dividends received by common stockholders is greater than a predetermined per-share amount.
Option 2: If the preferred stock is cumulative and the dividends would be $30,000 then firstly, (21,000 shares * $10 * 8%) $16,800 will be paid to preferred stockholder then the remaining amount of $13,200 ($30,000-$16,800) will be given to common stockholders.
Option 3: If the preferred stock is cumulative and the dividends would be $75,000 then first (21,000 shares * $10 * 8%) $16,800 will be paid to preferred stockholder then the remaining amount of $58,200 ($75,000-$16,800) will be given to common stockholders.
a) Date of Declaration = 31st December 2018 because on that date, the board of directors is considering the distribution of a cash dividend.
b) Date of Record = 31st March 2018 because typically, if the exact date is not given, then we will have to consider the date on which financial year-end as the date of record i.e 31st March 2018.
c) Date of Payment = 31st March 2018 because the dividend should be paid on the record date of such declaration i.e 31st March 2018.
On the Date of Declaration i.e 31st December 2018, the company will not make a journal entry because on that date, no liabilities will be going to pay off or no future asset will be made. The Journal Entries will be made on the date of record in books and the date of payment.