Question

The books of Shamrock Corporation carried the following account balances as of December 31, 2020.

Cash		$ 209,000
Preferred Stock (6% cumulative, nonparticipating, $50 par)		284,000
Common Stock (no-par value, 318,000 shares issued)		1,590,000
Paid-in Capital in Excess of Par—Preferred Stock		156,000
Treasury Stock (common 3,000 shares at cost)		33,300
Retained Earnings		111,900

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 $0.30 per share on the common. The dividends in arrears shall be paid by issuing 1,420 shares of treasury stock.” At the date of declaration, the preferred is selling at $84 per share, and the common at $12 per share. Net income for 2021 is estimated at $70,200.

(a) Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 3,487.)

(b) Could Shamrock Corporation give the preferred stockholders 2 years’ dividends and common stockholders a 30 cents per share dividend, all in cash?

Answer 1

(a)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2021	For preferred dividends in arrears:
	Retained earnings	17040
	Treasury stock		17040
Dec. 31, 2021	For preferred current year dividends:
	Retained earnings	17040
	Cash		17040
Dec. 31, 2021	For common share dividend:
	Retained earnings	94926
	Cash		94926

Working:

Preferred dividend in arrears = 6% x $284000 = $17040

Current year preferred dividend = 6% x $284000 = $17040

Common dividend = $0.30 x (318000 - 3000 + 1420) = $0.30 x 316420 = $94926

(b) Yes.

Total dividends are $17040 + $17040 + $94926 = $129006 while the available cash balance is $209000. Hence, Shamrock could give the entire dividends in cash.