Question

Homestead Oil Corp. was incorporated on January 1, 2016, and issued the following stock for cash:

760,000 shares of no-par common stock were authorized; 140,000 shares were issued on January 1, 2016, at $18.00 per share.

• 250,000 shares of $110 par value, 7.50% cumulative, preferred stock were authorized, and 61,000 shares were issued on January 1, 2016, at $150 per share.
• Net income for the years ended December 31, 2016 and 2017, was $1,490,000 and $2,570,000, respectively.
• No dividends were declared or paid during 2016. However, on December 28, 2017, the board of directors of Homestead declared dividends of $1,840,000, payable on February 12, 2018, to holders of record as of January 19, 2018.

Use the horizontal model for the issuance of common stock and preferred stock on January 1, 2016. (Use amounts with + for increases and amounts with – for decreases.)

Use the horizontal model for the declaration of dividends on December 28, 2017. (Use amounts with + for increases and amounts with – for decreases.)

Use the horizontal model for the payment of dividends on February 12, 2018. (Use amounts with + for increases and amounts with – for decreases.)

Prepare the journal entries to record each of the below transactions. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

The issuance of common stock and preferred stock on January 1, 2016.

1. The declaration of dividends on December 28, 2017.

2. The payment of dividends on February 12, 2018.

Of the total amount of dividends declared during 2017, how much will be received by preferred shareholders?

Answer 1

Journal Entries:

01-Jan-16	Issuance of Common stock	Dr	Cr
	Cash                            (140,000*$18)	25,20,000
	Common Shares		25,20,000
01-Jan-16	Issuance of Preferred stock
	Cash                            (61,000*$150)	91,50,000
	Preferred Shares   (61,000*$110)		67,10,000
	Contributed Capital in excess of par		24,40,000

28-Dec-17	Declaration of Dividends	Dr	Cr
	Retained Earnings	18,40,000
	Dividends Payable		18,40,000

12-Feb-18	Payment of Dividends	Dr	Cr
	Dividends Payable	18,40,000
	Cash		18,40,000

The preferred shareholders will receive a dividend for 2 years as it is cumulative preferred shares.

The total amount for 2 years is = (61,000*$110)*7.5% * 2

= $ 1,006,500