Question

Rizzo Corporation has 30,000 shares of $50 par value, 4%, preferred stock (P/S) and 150,000 shares of $5 par value common stock (C/S) outstanding at year end,2017. All events are in chronological time order below.

a) Assume that Rizzo has reacquired 4,000 shares of common stock for use in a stock option plan. The preferred stock is cumulative and non-participating. One year’s P/S dividends is in arrears. A 15% cash dividend is declared for C/S holders. Provide the entry for the declaration of the dividend on both the C/S and P/S. Please compute (list separately) the amount of C/S & P/S dividends.

b) Rizzo declares a 10% stock dividend when the market price is $22 per share. Please prepare the entry made on declaration date by Rizzo.

c) What entry is made when the shares are issued?

Answer 1

a.

Entry for the declaration of preferred stock dividend;

Retained Earnings a/c Dr 120,000

To Preferred stock dividend payable a/c 120,000

Preferred stock dividend= 30000*50*4%

= 60,000

Dividend for the previous year is in arrears, since the preferred stock is cumulative, any previous unpaid dividends must be paid in the coming years before any payment of dividend to the common share holders. So, the previous dividend of $ 60,000 needs to be paid along with current year dividend. The total preferred dividend payable is $ 120,000.

Entry for the declaration of common stock dividend;

Retained Earnings a/c Dr 109,500

To Common stock dividend payable a/c 109,500

There was 150,000 shares outstanding at the beginning of the year. The company has repurchased 4000 of its shares for stock options. So the total common shares outstanding is 146,000 (150,000-4,000). The common stock dividend is calculated as the book value of common shares outstanding* rate of dividend declared. So the dividend is 146,000*5*15% = 109,500.

b.

Entry to record declaration of stock dividend;

Retained Earnings a/c Dr 321,200

To Common shares issuable as dividend a/c 73,000

To Additional Paid in capital a/c 248,200

Shares issued in a small stock dividend (25% or less of the total shares outstanding) are valued at the fair value of the shares on the date of declaration. The outstanding shares was 146,000 (150,000-4,000). 10% stock dividend equals 14,600 (146,000*10%). The excess of the fair value over par value is treated in additional paid in capital account,only the par value of shares are transferred to common shares payable as dividend account.

c. On the date of small stock dividend issue,the entry to record is;

Common shares payable as dividend a/c Dr 73,000

To common stock a/c 73,000