Financial Accounting
Financial Accounting
9th Edition
ISBN: 9781259738692
Author: Libby
Publisher: MCG
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Chapter 11, Problem 11.8P

Comparing Stock and Cash Dividends

Chicago Company reported the following information at the end of the current year:

Common stock ($8 par value; 35,000 shares outstanding) $280,000
Preferred stock, 10% ($15 par value; 8,000 shares outstanding) 12,000
Retained earnings 281,000

The board of directors is considering the distribution of a cash dividend to the two groups of stockholders. No dividends were declared during the previous two years. Assume the three cases below are independent of each other.

Case A: The preferred stock is noncumulative: the total amount of all dividends is $31,000.

Case B: The preferred stock is cumulative; the total amount of all dividends is $36,000.

Case C: The preferred stock is cumulative: the total amount of all dividends is $90,000.

Required:

  1. 1. Compute the amount of dividends, in total and per share, that would be payable to each class of stockholders for each case. Show computations.
  2. 2. Assume Chicago Company issued a 30 percent common stock dividend on the outstanding shares when the market value per share was $24. Fill in the table below to show how this stock dividend would compare to Case C.
AMOUNT OF DOLLAR INCREASE (DECREASE)
Item Cash Dividend—Case C Stock Dividend
Assets $ $
Liabilities $ $
Stockholders’ equity $ $

1.

Expert Solution
Check Mark
To determine

Compute the amount of dividends, in total and per share, that would be payable to each class of stockholder’s for each case.

Explanation of Solution

Preferred stock:

The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Common stock:

These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Retained earnings:

Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

Cash dividends:

The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

Compute the amount of dividends, in total and per share, that would be payable to each class of stockholder’s for each case:

Case A: Preferred is noncumulative and the total amount of all dividends is $31,000.

Particulars

Preferred Stock of 8,000 shares

(Amount in $)

Common Stock

of 35,000 shares

(Amount in $)

Total

(Amount in $)

Preferred shares ($120,000×10%)12,000 12,000
Balance carried to common stock  (1)19,00019,000
 12,00019,00031,000
Per share value (2) 1.50(3) 0.54 

(Table 1)

Working Notes:

Balance carried to common stock = (Total amount of all dividends Preferred shares)=$31,000$12,000=$19,000 (1)

Per share value of perferred stock of 8,000 shares} = DividendPerferredstock=$12,0008,000 Shares=1.50 (2)

Per share value of common stock of 35,000 shares} = DividendCommon stock=$19,00035,000 Shares=0.54 (3)

Case B: Preferred is cumulative and the total amount of all dividends is $36,000.

Particulars

Preferred Stock of 8,000 shares

(Amount in $)

Common Stock

of 35,000 shares

(Amount in $)

Total

(Amount in $)

Preferred shares: 
Arrears ($120,000×10%×2years)24,000 024,000
 Current year ($120,000×10%)12,000012,000
 36,000036,000
Per share value (4) 4.500 

(Table 2)

Working Notes:

Per share value of perferred stock of 8,000 shares} = DividendPerferredstock=$36,0008,000 Shares=4.50 (4)

Case C: Preferred is cumulative and the total amount of all dividends is $90,000.

Particulars

Preferred Stock of 8,000 shares

(Amount in $)

Common Stock

of 35,000 shares

(Amount in $)

Total

(Amount in $)

Preferred shares: 
Arrears ($120,000×10%×2years)24,000 024,000
 Current year ($120,000×10%)12,000012,000
Balance of common stock054,00054,000
 36,000(5) 54,00090,000
Per share value (4) 4.50(6)1.54 

(Table 3)

Working Notes:

Balance carried to common stock = (Total amount of all dividends Preferred shares)=$90,000$36,000=$54,000 (5)

Per share value of common stock of 35,000 shares} = DividendCommon stock=$54,00035,000 Shares=1.54 (6)

2.

Expert Solution
Check Mark
To determine

Explain the manner by which stock dividend will be compared to case C if company issues a 30% common stock dividend on the outstanding shares and if  the market value per share is $24.

Explanation of Solution

Schedule of Comparative Differences
ItemAmount of Dollar Increase (Decrease)
Cash Dividend – Case CStock Dividend
AssetsThere is a decrease in the value of cash by $90,000.No change
LiabilitiesThe liabilities increase by $90,000 when cash dividend is declared and it decreases during the payment of cash dividend.No change
Stockholders’ equityRetained earnings of the company reduce by $90,000.

Stockholder’s equity will not change on declaration of stock dividend.

The retained value gets reduced due to declaration of dividend and there will be equal increase in the value of common stock $84,000 (35,000×30%×$8).

(Table 4)

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Chapter 11 Solutions

Financial Accounting

Ch. 11 - Prob. 11QCh. 11 - Prob. 12QCh. 11 - Prob. 13QCh. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - Katz Corporation has issued 400,000 shares of...Ch. 11 - Prob. 2MCQCh. 11 - Which of the following statements about stock...Ch. 11 - Prob. 4MCQCh. 11 - Prob. 5MCQCh. 11 - Prob. 6MCQCh. 11 - Prob. 7MCQCh. 11 - Which statement regarding dividends is false? a....Ch. 11 - Prob. 9MCQCh. 11 - Prob. 10MCQCh. 11 - Sources of Equity and Retained Earnings LO11-1...Ch. 11 - Computing the Number of Unissued Shares The...Ch. 11 - Earnings per Share Ratio How is the earnings per...Ch. 11 - Recording the Sale of Common Stock To expand...Ch. 11 - Prob. 11.5MECh. 11 - Determining the Effects of Treasury Stock...Ch. 11 - Determining the Amount of a Dividend Cole Company...Ch. 11 - Prob. 11.8MECh. 11 - Dividend Yield Ratio How is the dividend yield...Ch. 11 - Prob. 11.10MECh. 11 - Prob. 11.11MECh. 11 - Computing Shares Outstanding In a recent annual...Ch. 11 - Computing Number of Shares The charter of Vista...Ch. 11 - Prob. 11.3ECh. 11 - Reporting Stockholders Equity The financial...Ch. 11 - Reporting Stockholders Equity and Determining...Ch. 11 - Finding Amounts Missing from the Stockholders...Ch. 11 - Prob. 11.7ECh. 11 - Reporting Stockholders Equity Ruths Chris...Ch. 11 - Determining the Effects of Transactions on...Ch. 11 - Prob. 11.10ECh. 11 - Prob. 11.11ECh. 11 - Prob. 11.12ECh. 11 - Prob. 11.13ECh. 11 - Preparing the Stockholders Equity Section of the...Ch. 11 - Recording and Analyzing Treasury Stock...Ch. 11 - Prob. 11.16ECh. 11 - Prob. 11.17ECh. 11 - Computing Dividends on Preferred Stock and...Ch. 11 - Prob. 11.19ECh. 11 - Prob. 11.20ECh. 11 - Prob. 11.21ECh. 11 - Prob. 11.22ECh. 11 - Prob. 11.23ECh. 11 - Prob. 11.24ECh. 11 - Prob. 11.25ECh. 11 - Finding Missing Amounts At the end of the year,...Ch. 11 - Preparing the Stockholders Equity Section of the...Ch. 11 - Recording Transactions Affecting Stockholders...Ch. 11 - Prob. 11.4PCh. 11 - Prob. 11.5PCh. 11 - Prob. 11.6PCh. 11 - Analyzing Treasury Stock Transactions Apple Inc....Ch. 11 - Comparing Stock and Cash Dividends Chicago Company...Ch. 11 - Prob. 11.9PCh. 11 - Prob. 11.10PCh. 11 - Recording and Comparing Cash Dividends, Stock...Ch. 11 - Prob. 11.12PCh. 11 - Prob. 11.1APCh. 11 - Prob. 11.2APCh. 11 - Prob. 11.3APCh. 11 - Prob. 11.4APCh. 11 - Recording and Reporting Stockholders Equity...Ch. 11 - Case A: The charter for Rogers, Incorporated,...Ch. 11 - Prob. 1BCOMPCh. 11 - Prob. 1CCOMPCh. 11 - Prob. 1DCOMPCh. 11 - Prob. 11.1CPCh. 11 - Prob. 11.2CPCh. 11 - Prob. 11.3CPCh. 11 - Computing Dividends for an Actual Company A recent...Ch. 11 - Prob. 11.5CPCh. 11 - Prob. 11.6CP
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