Question

Permabilt Corp. was incorporated on January 1, 2019, and issued the following stock for cash: 2,000,000 shares of no-par common stock were authorized; 750,000 shares were issued on January 1, 2019, at $35 per share. 800,000 shares of $100 par value, 7.5% cumulative, preferred stock were authorized; 540,000 shares were issued on January 1, 2019, at $105 per share. No dividends were declared or paid during 2019 or 2020. However, on December 22, 2021, the board of directors of Permabilt Corp. declared dividends of $15,000,000, payable on February 12, 2022, to holders of record as of January 8, 2022.

1. Use the horizontal model for the issuance of common stock and preferred stock on January 1, 2019. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

2. Use the horizontal model for the declaration of dividends on December 22, 2021. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

3. Use the horizontal model for the payment of dividends on February 12, 2022. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

Answer 1

Common stock issued are no -par value common stock and so entire amount is credited to common stock for increase.

There would be cash inflow and thus cash is debited for increase.

1.

Assets

=

Liabilities

+

Stockholder's equity

=

Revenue

-

Expenses

=

Net income

Issue of common stock

Cash

$26,250,000

Common stock, no par value

$26,250,000

750000*35

750000*35

Issue of preferred stock would lead to cash inflow and so cash is debited for increase.

Preferred stock is credited to extent of par value of shares and amount in excess of par value is credited to paid in capital excess of par.

Assets

=

Liabilities

+

Stockholder's equity

=

Revenue

-

Expenses

=

Net income

Issue of preferred stock

Cash

$56,700,000

Preferred stock

$54,000,000

540000*105

(540000*100)

Paid in capital excess of par - preferred stock

$2,700,000

(540000*5)

2.

Assets

=

Liabilities

+

Stockholder's equity

=

Revenue

-

Expenses

=

Net income

Declaration of stock dividend

Dividend payable

$15,000,000

Retained earnings

-$15,000,000

3.

Assets

=

Liabilities

+

Stockholder's equity

=

Revenue

-

Expenses

=

Net income

Dividend paid

Cash

-$15,000,000

Dividend payable

-$15,000,000

Dividend are paid from retained earnings and on declaration date dividend are yet to be paid, thus liability would increase and retained earnings would decrease.

When dividend is paid there would be cash outflow and thus cash would decrease and liability for dividend would decrease.