Question

Amelia Corporation has the following information in its financial statement:

Preferred Stock 6%, $100 par, cumulative, 10,000 shares authorized $ 540,000

Common Stock, $2 par, 400,000 shares authorized, 320,000 issued 640,000

Paid-in-Capital – Preferred 760,000

Paid-in Capital – Common 2,560,000

Retained earnings 2,373,400

1. If Amelia paid a total of $75,000 in dividends, how much would each common stockholder receive for each share of stock owned? (Assume there are no dividends in arrears.)

A) $0.23 per share

B) $0.13 per share

C) $0.18 per share

D) $0.08 per share

2. How many shares of preferred stock are outstanding?

A) 32,400 shares

B) 5,400 shares

C) 10,000 shares

D) The number of shares cannot be determined without more information.

3. If Amelia did not pay a dividend for the last two years, but declared a $250,000 dividend this year, how much will the common stockholders receive?

A) $152,800

B) $250,000

C) $97,200

D) $217,600

4. If Amelia decided to purchase 20,000 shares of its common stock to be used for future stock option plans at $11.40 per share, what journal entry would the company make?

Answer 1

1) Option-(B): $0.13 per share Reason: Total dividends paid Less: Preferred dividends payable Dividends payabale to common shareholders Number of common shares oustanding Dividend per common share outstanding $75,000 $32,400 [$540000 x 6%; Current year's dividend alone because there are no dividends in arrears] $42,600 [$75000 - $32400] 320,000 $0.13 [$42600 / 320000 shares] 2) Option-(B): 5,400 shares Reason: Amount of preferred shares outstanding Par value per preferred share Number of preferred shares oustanding $540,000 $100 5,400 ($540000 / $100]

3) Option-(A): $152,800 Reason: Cumulative preference shares means if firm fails to pay or pays short preferred dividends in any of the years, it must be accumulated to next year. When next year's dividends are declared, arrear of preferred dividend shall be paid first; current year's preferred dividends shall be paid next; If anything out of total dividends is left common dividend shall be paid. As it is given that Amelia did not pay a dividend for the last two years, firm must pay two years' arrear dividends first to preferred shareholders, current year's preferred dividend next and finally if anything is left out, it shall be paid to common shareholders. Two year's preferred dividend - Arrears One year's preferred dividend - Current Dividends payable to preferred shareholders Total dividends declared during the year Dividends payabale to common shareholders $64,800 [$540000 x 6% x 2 years) $32,400 ($540000 x 6%] $97,200 $250,000 $152,800 [$250000 - $97200] 4) When a firm repurchases its own stock from the market or from existing shareholders, the repurchased stocks are called as treasury stocks. It shall be recorded at the price paid for purchasing the same and it shall be reported as a negative figure under stockholders' equity section on firm's balance sheet. Journal entry to record stocks repurchased by the firm shall be: Credit General Journal Treasury Stock Cash Stock Debit $228,000 [20,000 shares x $11.40] [Cash account is credited because cash goes out from the firm when treasury stocks are purchased] $228,000