Question

1. Record the journal entries for the following facts.
   1. 1,000 shares of common stock outstanding.
   2. 600 shares of cumulative preferred stock, dividend $3
   3. The cumulative preferred stock has been outstanding for 20 years.
   4. Paid dividends two years ago.
   5. Paid no dividends last year.
   6. The board of directors declared $5,000 of dividends for the current year
   7. Paid the dividends ten days after they were declared.

Answer 1

The nature of cumulative preferred stock is that unpaid dividends are cumulated and paid at a later date when funds are available. Unpaid Dividend on cumulative preferred stock shall be paid before payment of any dividend on common stock.

In the question, it is uderstood that $3 is payable as dividend per share for the preferred stock. Hence the dividend payable is $3 x 600 shares = $ 1800.

It is mentioned that preferred stock is outstanding for 20 years and dividends were paid 2 years ago. It is assumed that all dividends upto 2 years ago has been paid. Balance pending is last year and current year. Dividend in arrears are disclosed as a foot note in the financials. No entry is passed for arrears.

Current year $5,000 has been declared and the split shall be as follows:

Particulars	Amount $
Dividend (arrears) for preferred Stock	1,800
Dividend Current year for preferred Stock	1,800
Balance for Common Stock	1,400
Total	5,000

Journal Entry shall be

Declaration Retained Earnings	Dr	5,000
Dividend Payable (preference Stock)	Cr	3,600
Dividend Payable (Common Stock)	Cr	1,400
On Payment
Dividend Payable (preference Stock)	Dr	3,600
Dividend Payable (Common Stock)	Dr	1,400
Bank	Cr	5,000