dividends Flashcards
East Corp., a calendar-year company, had sufficient retained earnings in 2003 as a basis for dividends, but was temporarily short of cash.
East declared a dividend of $100,000 on April 1, 2003 and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, 2003, had a maturity date of March 31, 2004 and an interest rate of 10%.
How should East account for the scrip dividend and related interest?
A. Debit retained earnings for $110,000 on April 1, 2003. B. Debit retained earnings for $110,000 on March 31, 2004. C. Debit retained earnings for $100,000 on April 1, 2003, and debit interest expense for $10,000 on March 31, 2004. D. Debit retained earnings for $100,000 on April 1, 2003, and debit interest expense for $7,500 on December 31, 2003.
D. Retained earnings is reduced only by the amount of the dividend otherwise payable in cash, in this case $100,000. Interest on the notes is recognized as interest expense, not as a part of the dividend. 12/31/03 is three-fourths of the way into the note term. Thus, .75(.10)($100,000) or $7,500 of interest expense should be recognized on this date.
At December 31, 2004 and 2005, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, 2003. Apex did not declare a dividend during 2004. During 2005, Apex paid a cash dividend of $10,000 on its preferred stock.
Apex should report dividends in arrears in its 2005 financial statements as a(an)
A. Accrued liability of $15,000. B. Disclosure of $15,000. C. Accrued liability of $20,000. D. Disclosure of $20,000.
D. The annual preferred stock dividend is $15,000 (3,000 x $100 x 5%). Total dividends in arrears at the end of 2005 are therefore $20,000 (2 years x $15,000 - $10,000 paid). Dividends in arrears are footnoted only. They are not recognized as a liability until they are declared.
A property dividend should be recorded in retained earnings at the propertys
A. Market value at date of declaration.
B. Market value at date of issuance (payment).
C. Book value at date of declaration.
D. Book value at date of issuance (payment).
Market value at date of declaration.
The date of declaration is the date on which the firm has made the commitment to pay the dividend. The market value on this date is the value that was considered when the board made the decision to distribute a property dividend and thus is the appropriate measure of the sacrifice to the firm.
On June 27, 2004, Brite Co. distributed to its common stockholders 100,000 outstanding common shares of its investment in Quik, Inc., an unrelated party. The carrying amount on Brite’s books of Quik’s $1 par common stock was $2 per share. Immediately after the distribution, the market price of Quik’s stock was $2.50 per share.
In its income statement for the year ended June 30, 2004, what amount should Brite report as gain before income taxes on disposal of the stock?
A. $250,000
B. $200,000
C. $50,000
D. $0
C, The gain or loss on disposal of the asset distributed in a property dividend is the same gain or loss that would be recognized had the asset been sold at the time of the dividend.
The gain or loss is the difference between fair value and book value or $.50 per share of Quik stock for a total gain of $50,000 (100,000 x $.50). The difference is a gain because fair value exceeds book value.
A corporation issuing stock should charge retained earnings for the market value of the shares issued in a(an) A. Employee stock bonus. B. Pooling of interests. C. 10% stock dividend. D. 2-for-1 stock split.
c. Stock dividends, like all dividends, cause a decrease (debit or charge) in retained earnings. A stock dividend is a permanent capitalization of retained earnings to contributed capital. Stock dividends are made in lieu of cash dividends. Small stock dividends (those less than 20% to 25%) are capitalized at the market value of the shares issued.
Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise.
The excess of the merchandise’s carrying amount over its market value should be
A. Ignored. B. Reported as a separately disclosed reduction of retained earnings. C. Reported as an extraordinary loss, net of income taxes. D. Reported as a reduction in income before extraordinary items.
d. When the carrying value and market value of an asset distributed as a property dividend are different, the resulting gain or loss on disposal is recognized as ordinary income, just as the gain or loss from disposal is recognized for any other reason.
Had the asset been sold first, and the cash proceeds distributed in lieu of the property dividend, the same gain or loss would have resulted. The disposal loss or gain is recognized in income from continuing operations.
Mio Corp. was the sole stockholder of Plasti Corp.
On September 30, 2004, Mio declared a property dividend of Plasti’s 2,000 outstanding shares of $1 par value common stock, distributable to Mio’s stockholders.
On that date, the book value of Plasti’s stock was $1.50 per share. Immediately after the distribution, the market value of Plasti’s stock was $4.50 per share.
What amount should Mio report in its 2004 financial statements as gain on disposal of the Plasti stock?
A. $1,000 B. $2,000 C. $3,000 D. $6,000
D. When a property dividend is distributed, any unrealized holding gain or loss on the property is first recognized. The distribution of the property is a disposal and thus calls for the recognition of any holding gain or loss in earnings.
The market value exceeded the carrying value of the investment in Plasti stock by $3.00 per share ($4.50 - $1.50) on the distribution date. This is the gain recognized per share of stock distributed. With 2,000 shares distributed, the total gain is $6,000 ($3.00 x 2,000).
The gain that is recognized on the distribution of the property dividend is the same as that which would have resulted had Mio first sold the Plasti stock for a $6,000 gain and then distributed the proceeds from the sale of the stock as the dividend. The net effect on shareholders’ equity would be the same either way.
On December 1, 2005, Nilo Corp. declared a property dividend of marketable securities to be distributed on December 31, 2005, to stockholders of record on December 15, 2005. On December 1, 2005, the marketable securities had a carrying amount of $60,000 and a fair value of $78,000.
What is the effect of this property dividend on Nilo’s 2005 retained earnings, after all nominal accounts are closed?
A. $0 B. $18,000 increase. C. $60,000 decrease. D. $78,000 decrease.
c. A property dividend is recorded at fair value, in this case $78,000. That is the reduction (debit) in retained earnings recorded in the entry for the dividend. But in this entry, the gain on disposal of the securities is also recorded.
The distribution of the assets is treated as a disposal. Had the securities been sold first, and the proceeds distributed, all parties would be in the same economic position compared to the property dividend. The $18,000 gain on disposal increases income which, when closed to retained earnings, causes retained earnings to increase $18,000. The net decrease in retained earnings is $60,000 ($78,000 - $18,000).
Bal Corp. declared a $25,000 cash dividend on May 8, 2005, to stockholders of record on May 23, 2005, payable on June 3, 2005. As a result of this cash dividend, working capital A. Was not affected. B. Decreased on June 3. C. Decreased on May 23. D. Decreased on May 8.
d. It is at declaration that a dividend has its effect on the value of the firm and on working capital. Retained earnings are decreased (or a holding account called Dividends, which is closed to retained earnings, may be recorded), and dividends payable are increased. Dividends payable are a current liability, causing working capital to decrease.
Working capital equals current assets, less current liabilities. The payment of a dividend does not affect working capital, because both cash and the dividend payable are reduced. Both current assets and current liabilities are reduced by the same amount.
Godart Co. issued $4.5mn notes payable as a scrip dividend that matured in five years. At maturity, each shareholder of Godart’s 3mn shares will receive payment of the note principal, plus interest. The annual interest rate was 10%.
What amount should be paid to the stockholders at the end of the fifth year?
A. $450,000 B. $2.25m C. $4.5mn D. $6.75mn
d. Instead of paying $4.5mn in dividends at declaration, the firm decided to issue notes due in five years, calling for the principal amount ($4.5mn), plus five years of simple interest to be paid. The note does not call for compounding.
Therefore, the amount due at maturity is $4.5mn + (5 years)(.10)($4.5mn) = $6.75.
Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole’s
Paid-in capital Retained earnings
No No
Yes Yes
No Yes
Yes No
yes, no. A liquidating dividend is a return of capital. Its source is not earnings, and, therefore, it is not retained earnings. The firm is liquidating part of its permanent capital. The usual account to debit for a liquidating dividend is additional paid-in capital.
In 2005, Elm Corp. bought 10,000 shares of Oil Corp. at a cost of $20,000. On January 15, 2006, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, 2006, payable on February 15, 2006. During 2006, the Oil stock had the following market values:
January 15 $25,000
February 1 26,000
February 15 24,000
The net effect of the foregoing transactions on retained earnings during 2006 should be a reduction of
A. $20,000 B. $24,000 C. $25,000 D. $26,000
a. The property dividend is recorded at market value, with a debit of $25,000 to retained earnings at declaration. A gain of $5,000 on the securities is recognized as a gain on disposal (as if it were sold). The net effect is a decrease in retained earnings of $20,000.
