Question

Barber Inc. showed the following balances on Jan. 1 of the current year:

Cash $ 45,000

Other current assets 25,000

Operational assets, net of depreciation 235,000

Other assets 55,000

Total $ 360,000

Current liabilities $ 30,000

Long-term liabilities 60,000

Capital stock, par $10 (20,000 shares) 200,000

Contributed capital in excess of par 15,000

Retained earnings 55,000

Total $ 360,000

Required:

1. The board of directors of the Barber is considering a cash dividend. As the company controller, you have been asked to determine the maximum amount of dividends that can be paid on January 1, and to suggest to the board some specific amounts of dividends that might be paid.

2. What amount of dividends would you recommend be paid based on the data from the accounts?

3. Show the entries would be made at each of the following dates if a cash dividend of $27,000 is declared.

a. Declaration date b. Record date c. Payment date 4.

If a balance sheet were prepared between the declaration date and the payment date, how would the dividend declaration be reported?

Answer 1

1.

When a company pays cash dividend, paid-capital in excess of par value-common stock will not be affef6ecd. Maximum amount of dividend cannot be more than $55,000 o retained earnings. Retained earnings are the accumulated net income of B Inc. Therefore, it is not possible to pay any dividend in excess of retained earnings balance.

2.

Company can pay cash dividend in any range from 35%-55% called as healthy, 55%-75% high, and 75%-95% very high. In the present question, no current year net income is given. Therefore, minimum 35% of retained earnings can be provided as dividend. The dollar amount of 35% is $19,250 (i.e., $55,000*0.35. Therefore, one can recommend ideal amount of cash dividend is $19,250.

3.

Journal Entries for cash dividends:

a.

Declaration of dividend

Date	Account title and explanation	LF	Debit	Credit
	Retained earnings		$ 27,000
	Dividends payable			$ 27,000
	( To record the declaration of cash dividend)

b.

Record of dividend:

Date	Account title and explanation	LF	Debit	Credit
	(No entry)

c.

Payment of dividend:

Date	Account title and explanation	LF	Debit	Credit
	Dividends payable		$ 27,000
	Cash			$ 27,000
	( To record the cash dividend paid)

3.

If the balance sheet is prepared between the declaration a payment of divided, the dividend is reported in balance sheet as Dividend payable. The reason is, once dividend is declared it becomes liability of the company and must be paid within 30 days from the date of declaration.