Question

QUESTION 9

Johnson Company had the following stock oustanding from January 1, Year 1 to December 31, Year 4:

        Common stock, $10 par, 20,000 shares issued and outstanding

        Preferred stock, $100 par value, 6%, 5,000 shares issued and outstanding

Also during that time, the company paid dividends as follows:

        Year 1        $80,000

        Year 2        $         0

        Year 3        $30,000

         Year 4        $70,000

A) Assuming the preferred stock is cumulative, what amount of dividends were paid to the common stockholders in Year 4?

	a.	0
	b.	$10,000
	c.	$40,000
	d.	$70,000
	e.	none of the above

B) Real Company announced a 2-for-1 stock split on its common stock. Before the announcement, the company had 30,000 shares of $.50 par value common stock outstanding. After the split, how many shares will be outstanding?

	a.	15,000
	b.	30,000
	c.	60,000
	d.	none of the above

C) Refer to the information above for Real Company. After the stock split, what is the balance in the company's common stock account?

	a.	$15,000
	b.	$30,000
	c.	$60,000
	d.	none of the above

Answer 1

• All working forms part of the answer
• Question 9

--PART A

Working

	Par Value per Preferred Share	Dividend rate	Dividend per Preferred Share	No. of Preferred Shares	Preferred Dividend
Annual Preferred Dividend:	$                        100	6.00%	$                   6.000	5,000	$            30,000.00

	Total Cash Dividend paid	Paid to Preferred	Paid to Common	Dividends in Arrears at Year end
1st year	$            80,000.00	$           30,000.00	$           50,000.00	$                          -
2nd year	$                           -	$                          -	$                          -	$          30,000.00
3rd year	$            30,000.00	$           30,000.00	$                          -	$          30,000.00
4th year	$            70,000.00	$           60,000.00 [30000 cumulated + 30000 current year’s]	$           10,000.00 = Answer	$                          -
TOTAL	$          180,000.00	$        120,000.00	$           60,000.00	$                          -

Correct Answer = Option ‘B’ $ 10,000

---PART B

Total Shares outstanding will be 30,000 x (2/1) Split Ratio = 60,000 shares

Correct Answer = Option ‘C’ 60,000 shares

---PART C

When shares are split, the total balance IS NOT CHANGED, only par value per share and no. of shares gets changed.

Before Split	30000 shares x $ 0.50 par Value	$          15,000.00
After Split	60000 shares x $ 0.25 par	$          15,000.00

Correct Answer = Option ‘A’ $ 15,000