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: January 1: Moore Company's balance sheet reveals that it is authorized to sell 625,000 shares of stock; 415,000 shares are issued and outstanding. April 12: Moore issued an additional 22,000 shares of stock. October 28: Moore Company's board of directors declared a dividend of $930,950 to be paid on November 29 to shareholders on record on November 19. November 12: Moore purchased 20,000 shares of its own stock to be available for employee purchase. November 19: Moore gathered the necessary data for all outstanding stockholders as of this date. November 24: Moore Company sold 16,000 of its shares of treasury stock. November 29: Moore paid the $930,950 dividend. Calculate the dividend per share to be paid to each common stockholder, rounded to the nearest cent. $ = $ per share shares Now, assume that the November 12 and November 24 transactions did not occur. Calculate the dividend per share in this case. $ = $ per share shares Hide Feedback Incorrect Additional Feedback Click on the underlined terms to review their definitions and how they impact the number of outstanding shares, 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? 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. Hide Feedback Incorrect Additional Feedback Review the underlined definition of treasury stock in the previous section of the problem. How does it affect outstanding shares? Journal entries for cash dividends Recall that a dividend is a distribution of the company's accumulated profits. Therefore, dividends reduce the company's . 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 . The debit of the first entry records the reduction of total equity. The credit of the first entry is the creation of , Dividends Payable, because a legal obligation to pay the dividend now exists. There is no entry required on the . The second entry records the distribution of the dividend and is prepared on the . This entry is a simple payment of an obligation in which Cash and Dividends Payable are decreased. Cash is and Dividends Payable is . Hide Feedback Partially Correct Additional Feedback Review the underlined definitions of declaration date, date of record, and payment date in the first section of this problem. APPLY THE CONCEPTS: Calculate the common and preferred dividends Tessio Corporation has been incorporated for 30 years. Its current paid-in capital is shown to the right. Tessio has been expanding its operations; its board of directors declared a small dividend of $7,900 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 $726,300 to stockholders on record at December 20, 2011, to be paid on December 27, 2011. Paid-in capital for Tessio Corporation: Preferred stock, $20 par, 7%, 18,000 shares authorized, 11,000 shares issued and outstanding $220,000 Common stock, $3 par, 300,000 shares authorized, 225,000 shares issued, 215,000 shares outstanding 675,000 Additional paid-in capitalExplanation / Answer
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