Chapter 15, Problem 1SSC

Surfing the Standards Cases

Surfing the Standards Case 1: Preferred Dividends

Tootles Company, a publicly traded entity, issued nonredeemable preferred stock on January 1, 2018, Tootles issued 1,000 shares of $100 par value shares for $82.425. On January 1, 2015, the market rate of interest for preferred stock with the same characteristics was 6%. The preferred shares will not pay any dividends in 2015 or 2016. In 2017, they will pay 1% of par. In 2018, they will pay 3% of par. In 2019 and thereafter, the shares will pay 6% of par.

Management would like to know how to account for these shares both at issuance and thereafter. Prepare a memo to the file using the Codification for support. Include any relevant journal entries. Assume that dividend payments occur at the end of the year.