Question

P15.7 (LO2,3) (Cash Dividend Entries) The books of Conchita SA carried the following  account balances as of December 31, 2019.

Cash	R$ 195,000
Share Capital-Preference (6% cumulative, non-participating, R$50 par)	300,000
Share Capital-Ordinary (no-par value, 300,000 shares issued)	1,500,000
Share Premium-Preference	150,000
Treasury Shares (ordinary 2,800 shares at cost)	33,600
Retained Earnings	105,000

The company decided not to pay any dividends in 2019.

The board of directors, at their annual meeting on December 21, 2020, declared the following: "The current year dividends shall be 6% on the preference and R$0.30 per share on the ordinary. The dividends in arrears shall be paid by issuing 1,500 treasury shares." At the date of declaration, the preference is selling R$80 at per share, and the ordinary at R$12 per share. Net income for 2020 is estimated at R$77,000.

Instructions

a. Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously.

b. Could Conchita SA give the preference shareholders 2 years' dividends and ordinary shareholders a 30 cents per share dividend, all in cash?

Answer 1

a) Journal Entries for Dividends decleration and Paymment.

Retained Earnings A/c (1,500 * 12) $18,000

Treasury Stock A/c $18,000

[To record preference shares dividend in arrears paid by issuing trasury stock]

Retained Earnings A/c (300,000 * 6%) $18,000

Cash A/c $18,000

[To record current year preference shares dividends paid]

Reyained Earnings A/c (300,000 * 0.30) $90,000

Cash A/c $90,000

[To record dividends paid to ordinary shareholders]   

b) Could Conchita SA give the preference shareholders 2 years' dividends and ordinary shareholders a 30 cents per share dividend, all in cash?

With the availble retained earnings and net income Conchita SA cannot give the preference shareholders 2 years' dividends and ordinary shareholders a 30 cents per share dividend, all in cash. Hence the last year arrears of preference share dividends is paid by issuing treasury stock. So, the company is able to pay the the dividends to the preference shareholders 2 years' dividends and ordinary shareholders at 0.30 per share in cash.