Question

Problem 4: Stock Issuance and cash dividends (12 pis On Feb. 12, 2017, Morning Star Industries issue $13 per share, for aggregate gross proceeds $91,000, proceeds of $89,600,000, after deducting promotional and effect the issue. stries issued 7 million of its $0.01 par common shares at ceeds $91,000,000. Morning Star received net o promotional and accounting fees of $1,400,000 to Required: Prepare the journal entry to record the above transaction (por Besides the above common stock, Morning Star also has $5,000,000 par of 3% cumulative nonparticipating preferred stock. The board of directors declared and paid cash dividends $120,000 in 2017, its first year of operation. In 2018 and 2019. the board declared and paid cash dividends of $200,000 and $160,000, respectively. Required: Determine the amounts of dividends preferred and common shareholders received in 2017, 2018, and 2019 respectively (7 pts).

Answer 1

Requirement 1:

Date	Account title and explanation	Debit	Credit
Feb 12,2017	Cash	$89,600,000
	Equity issuance fees*	$1,400,000
	Common stock (7,000,000 x $0.01)		$70,000
	Paid-in capital in excess of par-common (7,000,000 x $12.99**)		$90,930,000
	[To record issuance of common stock]

*Equity issuance fees = Total issue price - cash received by the Company

=$91,000,000-$89,600,000

=$1,400,000

**Paid-in capital in excess of par-common per share = Share issue price - par value

=$13.00-$0.01

=$12.99

Requirement 2:

Year	Total Cash dividends	-	Payment to Preferred Share Holder	=	Payment to Common Share Holder
2017	$120,000	-	$120,000	=	$0
2018	$200,000	-	$180,000	=	$20,000
2019	$160,000	-	$150,000	=	$10,000

Calculations:

Preferred dividend payable each year = $5,000,000 x 3% = $150,000

Preferred Dividend payable (Current year + Arrears)	-	Paid	=	Arrears
$150,000	-	$120,000	=	$30,000
$180,000	-	$180,000		$0
$150,000	-	$150,000		$0