Question

company D announces that it has 10,000,000 shares authorized and issued. In its initial public offering 7,000,000 of these shares were offered to the public. this leaves 3,000,000 yet to be offered and so they are not "outstanding." three years after the public offering Company D repurchased 2,200,000 shares. The Company continues to hold them for possible reissuance. they have not been retired. there has been no other activity in common stock other than its normal trading in the market. for purposes of measuring dividends how many shares should be counted as "outstanding?"

a.) the company then announces a $6 per share dividend on November 1 of its third fiscal year. on this date, what amount should be entered in the income statement as an expense?

b.) using the info in question a, what amount should be used to Debit Retained Earnings for the Dividend Declared?

c.) continuing with the info from parts a and b, on the dividend payment date announced by the Board, which happens to be December 20th of this year, what should be the Credit to Cash when dividends are paid to shareholders "of record?"

Answer 1

Solution

For the purpose of measuring dividends the number of shares that should be counted as "outstanding" are as follows:

Initial Public Offering - Number of shares repurchased by the Company

= 7,000,000 - 2,200,000 = 4,800,000 shares

(a) Considering that there have been no other offerings or repurchasing of the shares, the outstanding shares on which the company would be liable to dividend would be 4,800,000 shares.

Therefore, the amount that should be entered in the income statement as an expense relating to dividend would be,

= (4,800,000 x 6) = $ 28,800,000

(b) The company can debit retained earnings for the dividend declared depending upon the available balance in retained earnings.

If the company has a credit balance of $ 28,800,000 or more as retained earnings the whole amount can be debited for the dividend declared.

If the credit balance is less then $ 28,800,000, the company can only debit the available balance in the retained earnings.

(c) Total Dividend payable by the company is $ 28,800,000. So on the dividend payment date, a total of $ 28,800,000 should be credited to cash for payment to the shareholders.