Question

Snow Inc. has the following items in its current balance sheet:

Common Stock 10,000,000 shares authorized with 2,000,000 issued $6,000,000

Capital Surplus $24,000,000

Treasury Stock on Common 100,000 shares $6,000,000

Cumulative Preferred Stock 500,000 authorized

[2%] $100 par $8,000,000

Treasury Stock on Preferred Stock 10,000 shares $6,000,000

Retained Earnings $60,000,000

• Snow Inc. wishes to announce a total cash dividend of $40,000,000. How is this dividend to be split between the common and preferred stockholders?

• What is the dividend per share for common and preferred after the dividend distribution from question 1 above?

• Suppose Snow Inc. was three years in the arrears in paying dividends to the preferred stockholders, then what is the dollar amount of the preferred and common shareholder dividend?

• How many Snow common stock shares are truly outstanding?

• If Snow Inc. announces a 2 for 1 stock split of the cumulative preferred, then what is the new total number of shares outstanding after the preferred stock split?

• If Snow Inc. were to provide for a 5% common stock dividend, then how many new shares are to be mailed to existing shareholders?

• Assume in question [6] the market price of the common stock was $15 at the time of the stock dividend. Provide journal entry to record the stock dividend?

• Using the equity portion of Snow Inc. balance sheet above, determine the amount of the total equity in Snow Inc. Assume this question ignores the results of questions [1-7] above.

• What is the impact of the common and preferred cash dividend [$40,000,000 as per question 1 above] on the current balance sheet of Snow Inc.?

• What is the impact of the 20% common stock dividend on the balance sheet? Assume this question ignores questions [1-9] above.

  

Answer 1

As per policy, only 4 parts of a question are allowed to answer at a time, so answering 7 parts here :

Par value of common stock = $6000000 / 2000000 = $3 per Common Share
Outstanding Common Stock = 2000000 - 100000 = 1900000
Outstanding Preferred Stock = ($8000000/$100) - 10000 = 70000
Ans 1) Preferred dividend = (70000 * $100) * 2% = $140000
Cash dividend to Common shareholder= $40,000,000 - $140,000 = $39860000
Ans 2) Dividend per share:
Common=	39860000/1900000 = $20.98
Preferred=	140000/70000 = $2
Ans 3) Preferred dividend (with arrears) = (70000 * $100) * 2% * (3 + 1)= $140000 * 4 = $560000
Cash dividend to Common shareholder= $40,000,000 - $560,000 = $39440000
Ans 4) Outstanding Common Stock = 2000000 - 100000 = 1900000
Ans 5) Outstanding Preferred Stock after split= [($8000000/$100) - 10000] * (2/1) = 70000 * 2 = 140000
Ans 6) At 5% common stock dividend, new shares mailed to existing shareholders = 1900000 * 5% = 95000 shares
Ans 7)Journal Entry to record the stock dividend :
Accounts Title	Debit $	Credit $
Stock Dividend	1425000			(95000*15)
Common Stock		285000		(95000*3)
Capital Surplus		1140000		(95000*12)