Chapter 8, Problem 8.1ME

To determine

Concept Introduction:

Dividend Dividend is the reward given by the company from its residual profit to its shareholders. It can be in the form of cash or otherwise. It is given by the board of directors only after shareholder's approval through their voting rights. It is not mandatory for a company to declare dividends.

Dividends paid to the shareholders holding preferred stock of the company are termed as preferred dividends. This dividend is given preference over other common shares at the time of dividend distribution. In case of dividends remaining unpaid, dividends would be first paid to this class of shareholders whenever they are paid.

In case of cumulative shares if the dividend remains unpaid, that dividend amount is kept on cumulating over the years for which the dividend remains unpaid. In the event of dividend distribution, the cumulative dividend is also paid along with the regular dividend.

Requirement 1:

Accounting entry for issuance of stock as on January 1, 2016

Answer to Problem 8.1ME

Journal entry in the books of Altuve Co.

Date	Particulars	L.F.	Debit amount (in $)	Credit amount (in $)
January 1, 2016	Cash		16,80,000
	Common stock			1,40,000
	Additional paid-in capital			15,40,000
	(To record the issuance of 1,40,000 shares of common stock)

Explanation of Solution

For recording the entry of issuance of common stock, firstly we need to calculate the amount of cash generated. Cash amount would be debited with the total amount of cash received which would be:

  $\begin{array}{l}Cashamount=Numberofsharesissued\times Issuepricepershare\hfill \\ =1,40,000shares\times \$12pershare=\$16,80,000\hfill \end{array}$

Further, it is given in the problem that shares have a par value of $1 per share, thus common stock would be credited with the following:

  $Commonstock=1,40,000shares\times \$1pershare=\$1,40,000$

Also, Additional paid-in capital would be credited with:

  $\begin{array}{l}Additionalpaid-incapital=Numberofsharesissued\times \left(Issueprice-Parvalue\right)\hfill \\ =1,40,000\times \left(\$12-\$1\right)=\$15,40,000\hfill \end{array}$

The accounting entry to record the above transaction would be a debit to cash and corresponding credit to Common stock as well as Additional paid- in capital and would look like this:

Journal entry in the books of Altuve Co.

Date	Particulars	L.F.	Debit amount (in $)	Credit amount (in $)
January 1, 2016	Cash		16,80,000
	Common stock			1,40,000
	Additional paid-in capital			15,40,000
	(To record the issuance of 1,40,000 shares of common stock)

To determine

Concept Introduction:

Dividend Dividend is the reward given by the company from its residual profit to its shareholders. It can be in the form of cash or otherwise. It is given by the board of directors only after shareholder's approval through their voting rights. It is not mandatory for a company to declare dividends.

Dividends paid to the shareholders holding preferred stock of the company are termed as preferred dividends. This dividend is given preference over other common shares at the time of dividend distribution. In case of dividends remaining unpaid, dividends would be first paid to this class of shareholders whenever they are paid.

In case of cumulative shares if the dividend remains unpaid, that dividend amount is kept on cumulating over the years for which the dividend remains unpaid. In the event of dividend distribution, the cumulative dividend is also paid along with the regular dividend.

Requirement 2:

Accounting entry for declaration of dividends as on December 31, 2016

Answer to Problem 8.1ME

Journal entry in the books of Altuve Co.

Date	Particulars	L.F.	Debit amount (in $)	Credit amount (in $)
December 31, 2016	Retained earnings		2,80,000
	Dividends payable			2,80,000
	(To record the declaration of dividends)

Explanation of Solution

In recording the entry for declaration of dividends, Retained earnings would be debited and Dividends payable would be credited with the same amount. Amount of dividend would be calculated using the following formula:

  $Amountofdividend=Numberofshares\times Dividendpershare$

In the given problem, it is given that there are 1, 40,000 shares and dividend of $2 per share has been declared. Thus, dividend amount would be:

  $\begin{array}{l}Dividendamount=1,40,000shares\times \$2pershare\\ =\$2,80,000\end{array}$

The accounting entry to record the above transaction would be like below:

Journal entry in the books of Altuve Co.

Date	Particulars	L.F.	Debit amount (in $)	Credit amount (in $)
December 31, 2016	Retained earnings		2,80,000
	Dividends payable			2,80,000
	(To record the declaration of dividends)

To determine

Concept Introduction:

Dividend Dividend is the reward given by the company from its residual profit to its shareholders. It can be in the form of cash or otherwise. It is given by the board of directors only after shareholder's approval through their voting rights. It is not mandatory for a company to declare dividends.

Dividends paid to the shareholders holding preferred stock of the company are termed as preferred dividends. This dividend is given preference over other common shares at the time of dividend distribution. In case of dividends remaining unpaid, dividends would be first paid to this class of shareholders whenever they are paid.

In case of cumulative shares if the dividend remains unpaid, that dividend amount is kept on cumulating over the years for which the dividend remains unpaid. In the event of dividend distribution, the cumulative dividend is also paid along with the regular dividend.

Requirement 3:

Accounting entry for payment of dividends as on February 7, 2017

Answer to Problem 8.1ME

Journal entry in the books of Altuve Co.

Date	Particulars	L.F.	Debit amount (in $)	Credit amount (in $)
February 7, 2017	Dividends payable		2,80,000
	Cash			2,80,000
	(To record the payment of dividends)

Explanation of Solution

In recording the entry for dividends payment, Dividends payable would be debited and Cash would be credited with the same amount. Amount of dividend payable would be calculated using the following formula:

  $Amountofdividend=Numberofshares*Dividendpershare$

In the given problem, it is given that there are 1, 40,000 shares and dividend of $2 per share has been paid. Thus, dividend amount would be:

  $Dividendamount=1,40,000shares*\$2pershare=\$2,80,000$

The accounting entry to record the above transaction would be like below:

Journal entry in the books of Altuve Co.

Date	Particulars	L.F.	Debit amount (in $)	Credit amount (in $)
February 7, 2017	Dividends payable		2,80,000
	Cash			2,80,000
	(To record the payment of dividends)