Blueprint Problem: Cash Dividends Dividends If you are the owner of a company, y

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Blueprint Problem: Cash Dividends

Dividends

If you are the owner of a company, you expect to be able to take part of the company's profits. If you own shares of stock of a corporation, you own part of that company. A dividend is a distribution of a company's accumulated profits to its owners, the stockholders. These distributions are usually in the form of cash dividends, but they may also be in the form of stock dividends or even noncash assets, which can be distributed to the owners. The decision to pay any dividend is made by the company's board of directors, not by the management of the company. When the board announces that the company will pay a dividend, there are three dates specified: the declaration date, the date of record, and the payment date.

It is important to understand which shares are eligible to receive dividends. A company classifies its stock as authorized, issued, and outstanding. Only outstanding shares, that is, shares held by someone other than the issuing company, are eligible to receive dividends.

Consider the following and determine the number of outstanding shares at each date:

Outstanding shares:

Calculate the dividend per share to be paid to each common stockholder, rounded to the nearest cent.

Now, assume that the September 6 and September 29 transactions did not occur. Calculate the dividend per share in this case.

Dividend Preference

You may recall that there are typically two classes of stock: common stock and preferred stock. When the board of directors declares a dividend, the preferred shareholders are paid first at the dividend rate. Preferred dividends are affected by another feature: cumulative or noncumulative, which determines whether missed dividends become dividends in arrears. After the preferred dividends are paid, the remaining dividend is divided among the common stockholders (unless the preferred shares are also participating shares). The common dividend per share is determined by dividing the dividend available to common stockholders by the number of common shares outstanding.

Do treasury shares participate in any dividend? SelectYesNoCorrect 1 of Item 2

Click here for an illustrated example. Below is a recap of the steps in the example.
1. Review the structure of the paid-in capital.
2. Calculate the preferred annual dividend.
3. Review the dividend history.
4. Determine the dividends in arrears for any cumulative stock.
5. Begin the distribution of the declared dividend.
6. Dividends in arrears are paid first.
7. Current preferred dividends are paid.
8. Calculate the total dividend paid to common shares.
9. Calculate the common dividend per share.
10. Consider a noncumulative preferred structure.
11. Determine dividends in arrears for year 1.
12. Determine dividends in arrears for year 2.
13. Distribute the total dividend.
14. Calculate the common dividend per share.

Journal entries for cash dividends

Recall that a dividend is a distribution of the company's accumulated profits. Therefore, dividends reduce the company's Selectretained earningspaid-in capitalCorrect 1 of Item 3. Even though dividends reduce total equity, dividends are not reported as an expense because they are a distribution of profits rather than a cost incurred in the operation of the business. There are usually two entries to record dividends. The first entry is prepared on the Selectdeclaration datedate of recordpayment dateCorrect 2 of Item 3. The debit of the first entry records the reduction of total equity. The credit of the first entry is the creation of Selecta liabilitya revenuean assetan expenseCorrect 3 of Item 3, Dividends Payable, because a legal obligation to pay the dividend now exists. There is no entry required on the Selectdate of recorddeclaration datepayment dateCorrect 4 of Item 3. The second entry records the distribution of the dividend and is prepared on the Selectdate of recorddeclaration datepayment dateCorrect 5 of Item 3. This entry is a simple payment of an obligation in which Cash and Dividends Payable are decreased. Cash is SelectcrediteddebitedCorrect 6 of Item 3 and Dividends Payable is SelectcrediteddebitedCorrect 7 of Item 3.

APPLY THE CONCEPTS: Calculate the common and preferred dividends

Franco Corporation has been incorporated for 30 years. Its current paid-in capital is shown to the right. Franco has been expanding its operations; its board of directors declared a small dividend of $4,100 in 2009 and no dividend in 2010. The expansion was a success, and profits have increased. On December 1, 2011, the board of directors declared a dividend of $510,200 to stockholders on record at December 20, 2011, to be paid on December 27, 2011.

Determine the annual preferred dividend, assuming the number of shares of preferred stock issued and outstanding has not changed for the past three years:

$ x  % x  shares = $

How much dividend is in arrears for 2009? $

How much dividend is in arrears for 2010? $

Use the information in the above table and calculated to the above to complete the table below to illustrate the distribution of the 2011 dividend.

After you have determined the dividends available to the common stockholders, calculate the dividend per share to be paid to each common stockholder. If required, round the per share amount to the nearest cent.

APPLY THE CONCEPTS: Prepare the journal entries for Franco’s dividend

Franco uses temporary accounts to record dividends and closes those accounts to Retained Earnings at the end of the period. Use the selection lists to the left of the journal to illustrate the effect on the accounting equation. If you are not sure about the account titles, refer to the chart of accounts below the last journal entry.

Prepare the journal entry for preferred dividends required on the declaration date.

GENERAL JOURNAL

   

Dec. 1

  

   

   

                  

           

  

   

   

                  

Indicate the effect on the accounting equation of the transactions (by row) in the journal entry above.

Prepare the journal entry for common dividends required on the declaration date.

GENERAL JOURNAL

   

Dec. 1

  

   

   

                  

           

  

   

   

                  

Indicate the effect on the accounting equation of the transactions (by row) in the journal entry above.

Prepare the journal entry required on the payment date.

If an amount box does not require an entry, leave it blank.

+ Assets

+ Liabilities

+ Equity

+ Revenues/Gains

+ Expenses/Losses

GENERAL JOURNAL

   

Dec. 27

  

   

   

                  

                  

           

Cash Dividends Payable-Common

   

   

                  

                  

           

  

   

   

                  

                  

Indicate the effect on the accounting equation of the transactions (by row) in the journal entry above.

Outstanding shares:

January 1: McNeil Company's balance sheet reveals that it is authorized to sell 625,000 shares of stock; 415,000 shares are issued and outstanding. February 15: McNeil issued an additional 22,000 shares of stock. August 31: McNeil Company’s board of directors declared a dividend of $930,950 to be paid on September 30 to shareholders on record on September 21. September 6: McNeil purchased 20,000 shares of its own stock to be available for employee purchase. September 21: McNeil gathered the necessary data for all outstanding stockholders as of this date. September 29: McNeil Company sold 16,000 of its shares of treasury stock. September 30: McNeil paid the $930,950 dividend.

Explanation / Answer

Treasury stock do not pay dividends.

Outstanding shares: January 1: McNeil Company's balance sheet reveals that it is authorized to sell 625,000 shares of stock; 415,000 shares are issued and outstanding. 415000 February 15: McNeil issued an additional 22,000 shares of stock. 437000 August 31: McNeil Company’s board of directors declared a dividend of $930,950 to be paid on September 30 to shareholders on record on September 21. 437000 September 6: McNeil purchased 20,000 shares of its own stock to be available for employee purchase. 417000 September 21: McNeil gathered the necessary data for all outstanding stockholders as of this date. 417000 September 29: McNeil Company sold 16,000 of its shares of treasury stock. 433000 September 30: McNeil paid the $930,950 dividend. 433000 Dividend          930,950 Shares on Sep 21          417,000 Dividend per share                 2.23 If Sep 6 and 29 transactions did not occur, the outstanding shares on Sep 21 would have been 437,000 Dividend per share                 2.13

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