300576

Question 1

Wood Co. owns 2,000 shares of Arlo, Inc.’s, 20,000 shares of $100 par, 6% cumulative, nonparticipating preferred stock and 1,000 shares (2%) of Arlo’s common stock. During 20X2, Arlo declared and paid dividends of $240,000 on preferred stock. No dividends had been declared or paid during 20X1. In addition, Wood received a 5% common stock dividend from Arlo when the quoted market price of Arlo’s common stock was $10 per share. What amount should Wood report as dividend income in its 20X2 income statement?

$12,500

$24,000

$12,000

$24,500

Answer 1

$24,000

Annual dividend requirement on preferred = $100 × .06 = $6/share × 20,000 shares = $120,000.

Preferred dividends paid in 20X2:

20X1 cumulative dividends $120,000
20X2 regular preferred dividends 120,000
Total dividends paid for 20X2 $240,000*
x 2,000 sh / 20,000 shares, Wood Co. x 0.10
$ 24,000

• The preferred stock dividend pays all required dividends in full.

Note: The 5% common stock dividend is not income. The increased number of shares simply serves to divide the total equity into smaller units.

Question 2

Cash Dividend

Answer 2

A cash dividend is the distribution of cash to stockholders in proportion to the number of outstanding shares held. Accounting for dividends involves a disbursement (credit) from the cash account and a reduction (debit) to Retained Earnings.

The entry to record would be:

 When declared:  DR  Retained Earnings     xx
                 CR    Dividends Payable        xx
       or
                 DR  Dividends Declared    xx
                 CR  Dividends Payable          xx

 When paid:      DR  Dividends Payable     xx
                 CR    Cash                     xx If a corporation uses the temporary account Dividends Declared, it is closed to Retained Earnings at the end of the accounting year.

A cash dividend represents a return on investment to shareholders.

Question 3

2294.15

Answer 3

Small stock dividends are accounted for on the basis of fair value of the shares issued in the form of a stock dividend. For example, assume that Company X has outstanding 1,000 shares of $10 par common stock. A 10% stock dividend is declared, meaning the current stockholders will receive 1 share of new stock for each 10 shares of the company’s stock presently held. Assuming the fair value of the shares issued as a stock dividend is $23 per share, the entries to record the stock dividend are:

Date of Declaration:
Retained Earnings (100 x $23) 2,300
Stock Dividends Distributable (100 x $10) 1,000
PIC–Stock Dividends 1,300

Date of payment:
Stock Dividends Distributable 1,000
Common Stock 1,000

Question 4

2294.20

Answer 4

Preferred stock may be cumulative or noncumulative. If cumulative, any preferred dividends not paid in prior years (dividends in arrears) plus the current year’s preferred dividend must be paid before any dividends can be paid to common stockholders. Noncumulative preferred stock has a preference right only with respect to the current year’s dividends. Prior years’ undeclared dividends are gone forever.

Question 5

FASB ASC 505-20-30-3