Question

Homestead Oil Corp. was incorporated on January 1, 2016, and issued the following stock for cash:

  

750,000 shares of no-par common stock were authorized; 150,000 shares were issued on January 1, 2016, at $17.00 per share.

280,000 shares of $110 par value, 9.00% cumulative, preferred stock were authorized, and 51,000 shares were issued on January 1, 2016, at $150 per share.

Net income for the years ended December 31, 2016 and 2017, was $1,390,000 and $2,530,000, respectively.

No dividends were declared or paid during 2016. However, on December 28, 2017, the board of directors of Homestead declared dividends of $1,650,000, payable on February 12, 2018, to holders of record as of January 19, 2018.

(a) Use the horizontal model for the issuance of common stock and preferred stock on January 1, 2016.
(b) Use the horizontal model for the declaration of dividends on December 28, 2017.
(c) Use the horizontal model for the payment of dividends on February 12, 2018.
(d) Of the total amount of dividends declared during 2017, how much will be received by preferred shareholders?

Answer 1

a. Horizontal model for the issuance of common stock and preferred stock on Jan 1, 2016
Balance sheet							Income Statement
Date	Assets	=	Liabilities	+	Stockholders Equity	<-	Net Income	=	Revenue	-	Expenses
1/1/2016	Cash +$10200000				Common stock +$2550000
					Preferred Shares +$5610000
					APIC +$2040000
Common Stock = 150000 shares x $17 = $2550000
Preferred shares = 51000 shares x $110 = $5610000
Addition paid in capital- preferred stock = 51000 shares x $40 = $2040000
b. Horizontal model for the declaration of dividends on December 28, 2017
Balance sheet							Income Statement
Date	Assets	=	Liabilities	+	Stockholders Equity	<-	Net Income	=	Revenue	-	Expenses
28/12/2017			Dividend Payable +$1650000		Retained Earnings -$1650000
c. Horizontal model for the payment of dividends on February 12, 2018
Balance sheet							Income Statement
Date	Assets	=	Liabilities	+	Stockholders Equity	<-	Net Income	=	Revenue	-	Expenses
12/2/2018	Cash                 -$1650000		Dividend Payable            -$1650000
d. Dividend paid to preferred shareholders
9% dividend on preferred stock for 2016 = $5610000 x 9% = $504900
9% dividend on preferred stock for 2017 = $5610000 x 9% = $504900
Total dividend to preferred shareholders = $1009800