Horizon Communications have the following stockholders' equity on December 31, 2016:
Paid in capital:
|Preferred stock - 4%, $11 par value; 150,000 shares authorized, 22,000 shares issued and outstanding||$242,000|
|Common Stock - $4 par value; 575,000 shares authorized, 350,000 shares issued and outstanding||$1,400,000|
|Paid in capital in excess of par-Common||$1,050,000|
|Total Paid in capital||$2,692,000|
|Total stockholders' Equity||$2,912,000|
1) Assuming the preferred stock is cumulative, compute the amount of dividends to preferred stockholders and to common stockholders for 2016 and 2017? If total dividends are $7,680 in 2016 and 49,000 in 2017.
Assume no changes in preferred stock and common stock in 2017
2) Record the journal entries for 2016, assuming that horizon communication declared the dividend on December 1 for stockholders and recorded on December 10 and horizon communication paid the dividends on December 20.
Cumulative Preferred Stock:
One of the sources of finance available to the company other than the issuance of common stock is the issuance of preferred stock. Preferred stock is issued with a fixed rate of dividend which is the required return expected by the preferred shareholders. There are various types of preferred stock one of which is the cumulative preferred stock and this stock type attracts dividends in arrears too. It means that shareholders get the arrears of dividends of past years in the year of adequate profits.
Answer and Explanation:
1) The total amount of dividends paid to Horizon's shareholders are computed below:
The first step is to determine the preferred dividend:
- Preferred dividend = Par value of preferred stock * Dividend rate
- Preferred dividend = $242,000 * 4%
- Preferred dividend = $9,680
Since in year 1, only $7,680 is distributed in dividends, the entire amount will be paid to the preferred shareholders with a balance of $2,000 ($9,680 - $7,680) in arrears which will be paid in the year of sufficient profits.
- Preferred dividend = Dividend in arrears + Current year dividend
- Preferred dividend = $2,000 + $9,680
- Preferred dividend = $11,680
- Common dividend = Total dividend - Preferred dividend
- Common dividend = $49,000 - $11,680
- Common dividend = $37,320
2) The journal entries for the declaration and payment of dividends for 2016 are made below:
|December 1||Retained earnings||$7,680|
|Preferred dividends Payable||$7,680|
|December 10||No journal entry needed.|
|December 20||Preferred dividends Payable||$7,680|
Learn more about this topic:
from Finance 101: Principles of FinanceChapter 16 / Lesson 1