Cash dividends and two classes of stock. Googelie Inc. has two classes of capita

Question

Cash dividends and two classes of stock. Googelie Inc. has two classes of capital stock outstanding: 45,000 shares of 8%, $100 par value cumulative preferred and 25,000 shares of $10 par value common. The company had a deficit (negative balance in retained earnings) of $230,000 at the beginning of the current year, and preferred dividends were two years in arrears. During the current year, the company earned net income of $1,735,000. What will be the balance in the Retained Earnings account at the end of the current year if the company takes all the actions necessary to pay a dividend of $1.50 per share on the common stock?

Explanation / Answer

Total Preference dividend paid: Prefered stcok capital 4,500,000 Annual dividend rate 8% Annual dividend amount 360,000 Arrears for last 2 years Therefore, Prefered dividend to be paid for 3 years Total prefered dividend paid 1080000 (360000*3) Common Dividend paid 37500 (25000 shares @ 1.50 pere share) Balance in Retained earnings at the end: Beginning balance in RE -230000 (as having debit balance) Add: Net income 1735000 1505000 Less: Dividend paid: Prefered dividend 1,080,000 Cmmon Dividend 37,500 Balance in Retained earnings at end 387,500 Therefore, Balance in Retained earnings at end : $ 387500 (Credit balance)

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