Chapter 10, Problem 85PSB

Common Dividends

Thompson Payroll Service began in 2019 with 1,500,000 authorized and 820,000 issued and outstanding S8 par common shares. During 2019, Thompson entered into the following transactions:

1. Declared a S0.20 per-share cash dividend on March 24.
2. Paid the S0.20 per-share dividend on April 6.
3. Repurchased 13,000 common shares for the treasury at a cost of S12 each on May 9.
4. Sold 2,500 unissued common shares for $15 per share on June 19.
5. Declared a $0.40 per-share cash dividend on August 1.
6. Paid the $0.40 per-share dividend on September 14.
7. Declared and paid a 10% stock dividend on October 25 when the market price of the common stock was $15 per share.
8. Declared a 50.45 per-share cash dividend on November 20.
9. Paid the $0.45 per-share dividend on December 20.

Required:

1. Prepare journal entries for each of these transactions. (Note: Round to the nearest dollar.)
2. What is the total dollar amount of dividends (cash and stock) for the year?
3. CONCEPTUAL CONNECTION Determine the effect on total assets and total stockholders’ equity of these dividend transactions.

To determine

(a)

Introduction:

Dividend is the amount that is paid to the stockholders’ periodically as a return on their investment in the company. Dividend can be made in two forms i.e. Cash Dividend and Stock Dividend.

To prepare:

Journal Entries for the given transactions.

Answer to Problem 85PSB

Journal Entries

S. No.	Date	Particulars	Debit ($)	Credit ($)
a.	March 24	Retained Earnings Dr. Dividends Payable	164,000	164,000
b.	April 6	Dividends Payable Dr. Cash	164,000	164,000
c.	May 9	Treasury Stock Dr. Cash	156,000	156,000
d.	June 19	Cash Dr. Common Stock Additional Paid-in Capital	37,500	20,000 17,500
e.	August 1	Retained Earnings Dr. Dividends Payable	323,800	323,800
f.	September 14	Dividends Payable Dr. Cash	323,800	323,800
g.	October 25	Retained Earnings Dr. Common Stock Additional Paid-in Capital	1,214,250	647,600 566,650
h.	November 20	Retained Earnings Dr. Dividends Payable	400,703	400,703
(i)	December 20	Dividends Payable Dr. Cash	400,703	400,703

Explanation of Solution

Given:

1,500,000 shares were authorized and 820,000 were issued and outstanding $8 par common shares.

(a) No. of shares issued and outstanding = 820,000

Cash Dividend per share = $0.20

Total cash dividend = $\text{No}\text{. of shares issued and outstanding × Cash Dividend per share}$

Total cash dividend = $\text{820,000 × \$0}\text{.20}$

Total cash dividend = $164,000

(c) No. of shares repurchased = 13,000

Value of repurchase = $12 per share

Total Value of repurchase of shares = $\text{No}\text{. of shares repurchased ×Value of repurchase}$

Total Value of repurchase of shares = $\text{13,000 × \$12}$

Total Value of repurchase of shares = $156,000

(d) No. of shares issued = 2,500

Market value of shares issued = $15

Par Value = $8

Total Market value of shares issued = $\text{No}\text{. of shares issued × Market value of shares issued}$

Total Market value of shares issued = $\text{2,500 × \$15}$

Total Market value of shares issued = $37,500

Total par value of shares issued = $\text{No}\text{. of shares issued × Par value of shares}$

Total par value of shares issued = $\text{2,500 × \$8}$

Total par value of shares issued = $20,000

Additional Paid-in Capital = Total Market value of shares issued - Total par value of shares issued

Additional Paid-in Capital = $37,500 - $20,000

Additional Paid-in Capital = $17,500

(e) No. of shares issued and outstanding = 820,000 − 13,000 + 2,500

No. of shares issued and outstanding = 809,500

Cash Dividend per share = $0.40

Total cash dividend = $\text{No}\text{. of shares issued and outstanding × Cash Dividend per share}$

Total cash dividend = $809,500\text{ × \$0}\text{.40}$

Total cash dividend = $323,800

(g) No. of shares issued and outstanding = 809,500

Stock Dividend = 10%

Stock Dividend = $809,500\text{ × 10\%}$

Stock Dividend = 80,950 shares

Total value of Stock Dividend = $\text{80,950 × \$15}$

Total value of Stock Dividend = $1,214,250

Total Par Value of Stock Dividend = $80,950\text{ × \$8}$

Total Par Value of Stock Dividend = $647,600

Additional Paid-in Capital = Total value of Stock Dividend - Total Par Value of Stock Dividend

Additional Paid-in Capital = $1,214,250 - $647,600

Additional Paid-in Capital = $566,650

(h) No. of shares issued and outstanding = 809,500 + 80,950

No. of shares issued and outstanding = 890,450

Cash Dividend per share = $0.45

Total cash dividend = $\text{No}\text{. of shares issued and outstanding × Cash Dividend per share}$

Total cash dividend = $890,450\text{ × \$0}\text{.45}$

Total cash dividend = $400,703.

To determine

(b)

Introduction:

Dividend is the amount that is paid to the stockholders’ periodically as a return on their investment in the company. Dividend can be made in two forms i.e. Cash Dividend and Stock Dividend.

To calculate:

Total cash and stock Dividend.

Answer to Problem 85PSB

Total Dividend (stock or cash) Paid during the year was $2,102,753.

Explanation of Solution

Given:

1,500,000 shares were authorized and 820,000 were issued and outstanding $8 par common shares.

As per the given transactions, the dividend (cash or stock) was paid on 4 dates:

Date	Type of Dividend	Amount ($)
April 6	Cash Dividend	164,000
September 14	Cash Dividend	323,800
October 25	Stock Dividend	1,214,250
December 20	Cash Dividend	400,703
-	Total Dividend Paid (stock or cash)	2,102,753

Calculations:

1. Dividend paid on April 6:

No. of shares issued and outstanding = 820,000

Cash Dividend per share = $0.20

Total cash dividend = $\text{No}\text{. of shares issued and outstanding × Cash Dividend per share}$

Total cash dividend = $\text{820,000 × \$0}\text{.20}$

Total cash dividend = $164,000

2. Dividend paid on September 14:

No. of shares issued and outstanding = 820,000 − 13,000 + 2,500

No. of shares issued and outstanding = 809,500

Cash Dividend per share = $0.40

Total cash dividend = $\text{No}\text{. of shares issued and outstanding × Cash Dividend per share}$

Total cash dividend = $809,500\text{ × \$0}\text{.40}$

Total cash dividend = $323,800

3. Dividend paid on October 25:

No. of shares issued and outstanding = 809,500

Stock Dividend = 10%

Stock Dividend = $809,500\text{ × 10\%}$

Stock Dividend = 80,950 shares

Total value of Stock Dividend = $\text{80,950 × \$15}$

Total value of Stock Dividend = $1,214,250

Total Par Value of Stock Dividend = $80,950\text{ × \$8}$

Total Par Value of Stock Dividend = $647,600

Additional Paid-in Capital = Total value of Stock Dividend - Total Par Value of Stock Dividend

Additional Paid-in Capital = $1,214,250 - $647,600

Additional Paid-in Capital = $566,650

4. Dividend paid on December 20:

No. of shares issued and outstanding = 809,500 + 80,950

No. of shares issued and outstanding = 890,450

Cash Dividend per share = $0.45

Total cash dividend = $\text{No}\text{. of shares issued and outstanding × Cash Dividend per share}$

Total cash dividend = $890,450\text{ × \$0}\text{.45}$

Total cash dividend = $400,703.

To determine

(c)

Introduction:

Dividend is the amount that is paid to the stockholders’ periodically as a return on their investment in the company. Dividend can be made in two forms i.e. Cash Dividend and Stock Dividend.

To calculate:

Total cash and stock Dividend.

Answer to Problem 85PSB

The net effect of the dividends will be:

1. Retained Earnings will reduce by cash dividend i.e. $888,503.
2. Balance in cash account will also reduce by cash dividend i.e. $888,503.

(Rest, stock dividend value will be adjusted by increasing common stock and additional capital, and by decreasing retained earnings by the same amount.).

Explanation of Solution

Given:

1,500,000 shares were authorized and 820,000 were issued and outstanding $8 par common shares.

As per the given transactions, the dividend (cash or stock) was paid on 4 dates:

Date	Type of Dividend	Amount ($)
April 6	Cash Dividend	164,000
September 14	Cash Dividend	323,800
October 25	Stock Dividend	1,214,250
December 20	Cash Dividend	400,703
-	Total Dividend Paid (stock or cash)	2,102,753

In accounting, every transaction has dual effect.

There are two types of dividend i.e. Stock and Cash Dividend.

1. The first effect of both the dividends (cash or stock) is on Retained Earnings of the company. The dividend payable amount reduces the balance in retained earnings.
2. The second effect of the dividend (cash or stock) is on the account through which they are paid.
3. If cash dividend is paid then the second effect is on cash account as cash in the company decreases.
4. If stock dividend is paid then the second effect is on common stock and additional paid in capital account as new shares are issued as dividends which further increase the balance of these accounts.

Total Cash Dividend = $164,000 + $323,800 + $400,703

Total Cash Dividend = $888,503

Total Stock Dividend = $1,214,250

Total Dividends Paid = Total Cash Dividend + Total Stock Dividend

Total Dividends Paid = $888,503 + $1,214,250

Total Dividends Paid = $2,102,753

This means,

1. Retained earnings will decrease by Total Dividends Paid i.e. $2,102,753.
2. Balance in cash account will decrease by total cash dividends paid i.e. $888,503.
3. Balance in common stock and additional paid in capital account will increase by Total Stock Dividend i.e. $1,214,250.