Common & Preferred Stock Transactions Part #11 (Subsection A) - Preferred Stock

Question

Common & Preferred Stock Transactions

Part #11 (Subsection A) - Preferred Stock Transactions

Prepare the appropriate journal entry to account for Gennevieve Incorporated issuance of 825,000 shares of $85 par value, 7.5%, cumulative preferred shares on January 15, 2013. The issue price was $105 per share at that date.

January 15, 2013 Entry:

Assuming Gennevieve Incorporated is a calendar year-end organization, prepare the appropriate journal entry to account for the preferred dividends on December 31, 2013; December 31, 2014 and December 31, 2015 if the reported income for those years were as follows:

Reported Income - $3,750,000

Reported Income - $0

Reported Income - $12,800,000

December 31, 2013 Entry:

December 31, 2014 Entry:

December 31, 2015 Entry:

Explanation / Answer

The journal entries for issue of cumulative preferred shares are as under:

Cash Account                                       $86,625,000

                        7.5%Cummulative Preferred Share Capital   $70,125,000

                        Additional paid in capital Account                     $16,500,000

(Being 7.5% cumulative preferred shares 825,000 issued at a premium of $20)

If the dividends are declared the cumulative preference share holders get there dividends for the last years in which the dividends has not been declared and then the dividend for the current year.

The cumulative preference share holders get the accumulated dividends before the current year dividend and the dividends for common stock. The cumulative preference dividends are recorded as liability when the dividend is declared by the board of directors. If the dividends are not declared then the undeclared dividends in arrears is not shown as liability on the balance sheet rather it is specified in foot notes to the balance sheet. The liability for cumulative dividend arises when the dividend is declared by board of directors of the company.

In the year 2013 the company has a profit of $3,750,000 and in the question, it has not been mentioned at the board of directors have declared any dividends for the year therefore no entry for recording the liability for payment of cumulative dividend for the year.

In the year 2014, the company has no profits therefore no question arises for declaration of dividends by the board of directors of the company.

In the year 2015 also the company has not declared any dividends therefore no entry will be passed for undeclared dividends.

If we assume that board of directors have declared dividends in the year 2015 then the cumulative dividend on the cumulative preference shareholders for last two years will be paid before paying the dividend of the current year (2015)

(on declaration date)Dividend –cumulative preference dividend Account            $5,259,375

                                                            Dividend payable Account                                $5,259,375

(Being cumulative preference dividends payable)

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