Question

P15.7 (LO 3) (Cash Dividend Entries) account balances as of December 31, 2020. The books of Conchita Corporation carried the following Cash Preferred Stock (6% cumulative, nonparticipating, $50 par) Common Stock (no-par value, 300,000 shares issued) Paid-in Capital in Excess of Par-Preferred Stock Treasury Stock (common 2,800 shares at cost) Retained Earnings $ 195,000 300,000 1,500,000 150,000 33,600 105,000 The company decided not to pay any dividends in 2020. The board of directors, at their annual meeting on December 21, 2021, declared the following: "The current year dividends shall be 6% on the preferred and $.30 per share on the common. The dividends in arrears shall be paid by issuing 1,500 shares of treasury stock." At the date of declaration, the preferred is selling at $80 per share, and the common at $12 per share. Net income for 2021 is estimated at $77,000. Instructions a. Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously.

Answer 1

Answer (a)
Date	Particular	Debit	Credit
31-12-2020	Retained Earnings	$ 1,26,000
	Dividend payable, Cumulative Preferred dividend arrearage ($300,000 x 6%)		$     18,000
	Dividend payable, Cumulative Preferred ($300,0000 x 6%)		$     18,000
	Dividend payable, Common (300,000 shares x $0.30)		$     90,000
	(To record declared Cumulative preferred and Common Dividend)
31-12-2020	Dividend Payable, Preferred dividend arrearage	$     18,000
	Treasury stock (1500 shares x $12)		$     18,000
	(To record Paid arrears on preferred dividend)
31-12-2020	Dividend payable, Cumulative Preferred	$     18,000
	Dividend payable, Common (300,000 shares x $0.30)	$     90,000
	Cash		$ 1,08,000
	(To record paid cash dividend for cumulative preferred and common dividends)
Answer (b)
Yes, Conchita Corporation can give the preferred stockholders 2 years’ dividends and common stockholders a 30 cents per share dividend, all in cash.
				Explanation:
To pay cash dividend Conchita Corporation have,
1	Dividend from retained earnings is legal.
2	Declaration of dividend by board of directors
3	Adequate cash
For total dividend payable of $126,000, There is adequate Cash($195,000) and Retained earnings $182,000 ($105,000+$77,000)
In this case, all the above conditions satisfied. Therefore Conchita Corporation can give the preferred stockholders 2 years’ dividends and common stockholders a 30 cents per share dividend, all in cash.

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