Question

The following information pertains to Scott’s Tots, which incorporated on 1/1/18:

Stockholders' Equity Section of Balance Sheet as of 1/1/2019

Preferred Stock, 6% cumulative, $25 par (issued on 1/1/18)$400,000

Additional paid-in capital – preferred 200,000

Common Stock, $0.50 par (issued on 1/1/18)500,000

Additional paid-in-capital – common stock4,500,000

Treasury Stock (10,000 shares)60,000

Beginning Retained Earnings (as of Jan 1, 2019)2,800,000

Scott’s Tots reports net income of $1,750,000 during 2019. On 12/31/19, the company declared and paid a dividend of $32,000, which was the first dividend the company had ever declared.

How many shares of common stock were issued on 1/1/18?

How much was received per share when the common stock was issued?

How many shares of common stock are outstanding as of 1/1/19?

How many shares of preferred stock were issued on 1/1/18?

How much was received per share when the preferred stock was issued?

What is the dividend amount (in dollars) stipulated for preferred stockholders?

How much of the 12/31/19 dividend will be distributed to preferred stockholders?

How much of the 12/31/19 dividend will be distributed to common stockholders?

How would your answers to the above question if the preferred stock was non-cumulative?

What was the repurchase price per share of Treasury Stock?

What is the company’s earnings per share for 2019 (rounded to the nearest cent)?

What will retained earnings be at the end of 2019?

Answer 1

How many shares of common stock were issued on 1/1/18?

Number of Common Stock = $ 500,000/0.5 = 1,000,000 shares.

How much was received per share when the common stock was issued?

Total Receipts/No of shares ie. (500,000+4,500,000)/1,000,000) => $ 5.00

How many shares of common stock are outstanding as of 1/1/19?

Total shares-Treasury stock Ie, 1,000,000 - 10,000 = 990,000 shares.

How many shares of preferred stock were issued on 1/1/18?

Total Preferred Stock/Par Value ie. 400,000/25 = 16,000 shares

How much was received per share when the preferred stock was issued?

Total Receipts/no of shares Ie (400,000+200,000)/16000 = $ 37.50

What is the dividend amount (in dollars) stipulated for preferred stockholders?

400,000*6% = $ 24,000.

How much of the 12/31/19 dividend will be distributed to preferred stockholders?

Since no dividends were paid in 2018, cumulative preference share holders will get 400,000*6% = $ 24,000. Moreover for 2019 they again get $ 24,000. So total dividend in arrears is $ 48000. Thus entire $ 32,000 will be paid to Preference Share holders

How much of the 12/31/19 dividend will be distributed to common stockholders?

Since all dividends are payable to preference share holders, Common Stock do not get any dividend

How would your answers to the above question if the preferred stock was non-cumulative?

If preference share were non cumulative, arrears for 2018 would not be liable. Thus among the $ 32,000 total of $ 24000 will first paid to preference share holders and balance ie $ 8,000 is paid to equity.

What was the repurchase price per share of Treasury Stock?.

$ 60,000/10,000 Shares = $ 6 per share.

What is the company’s earnings per share for 2019 (rounded to the nearest cent)?

(1750,000-32,000)/(990,000) = 1.735

What will retained earnings be at the end of 2019?

Retained Earnings

Beginning balance	$ 2,800,000
Net Income	$ 1,750,000
Less: Dividend	$ 32,000
Balance	$ 4, 518,000