Question

12. The cumulative feature of preferred stock A) limits the amount of cumulative dividends to the par value of the preferred stock. B) requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. C) means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock. D) enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends. 13. Masterson Company has 490,000 shares of $10 par value common stock outstanding. During the year Masterson declared a 15% stock dividend when the market price of the stock was $36 per share. Three months later Masterson declared a $.60 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by A) S2,984,100 B) $2,646,000 C) S D) S 462,000 485,100 14. Stock dividends distributable should be classified on the A) income statement as an expense. B) balance sheet as an asset. C) balance sheet as a liability D) balance sheet as an item of stockholders' equity. ysble

Answer 1

12. Answer is option B

Explanation:- Preference shares are those who have preferable rights of dividend getting paid when compared to equity share holders. When it comes to distribution of profit preference share holders are preferred first to the extent of % that is payable which is decided at the time of issue. Remaining profits only can be distributed to equity shareholders at the discretion of company whether more % than preference share holders or less % than preference shareholders. For both the above type of shareholders the distribution happen only when there is profit. But if preference shares comes with an extra right of cumulativeness then, even if there is a loss the dividend has to be accrued and when there are profits these accrued dividend should also be paid.

13. Answer is Option A

a	No of existing sahres	490,000.00
b	% of stock dividend declared	15%
c	No of shares to be issued	73500
d	Price per share	36
e	Value of stock to be issued (d*c)	2646000
f	Total No of shares (a+c)	563,500.00
g	Dividend per share	0.6
h	Total dividend (g*f)	338,100.00
i	Total reduction in earnings (h+e)	2,984,100.00

13. Answer is option C

Explanation:- Stock dividend distributable is an entry debiting retained earnings and crediting Stock dividend distributable account. It cannot be an asset because it is adjustment between credit balances of balance sheet items. Since it already pertains to an adjustment of balance sheet item it can not even be an expense. Since the liability is created by debiting the retained earnings and crediting the Stock distributable account, this should appear in balance sheet as a liability until the distribution happens