Question

Yanity Interiors, Inc., maker of seats and other interior equipment for Boeing aircraft, started 20X8 with the following balance sheet:

6% Cumulative convertible preferred stock, par value $10 a share, authorized 150,000 shares; issued 54,749 shares $ 547,490

Common stock, par value $.20 a share, authorized 2,000,000 shares, issued 1,520,320 shares        304,064

Additional paid-in capital 2,063,351

Retained earnings                2,463,951

Less: Treasury stock, at cost            

 Preferred stock, 6,008 shares        (75,100)

 Common stock, 9,309 shares         (167,549)

Total stockholders’ equity                 $5,136,207

Suppose Yanity Interiors had paid no dividends, preferred or common, in the prior year, 20X7. All preferred dividends had been paid through 20X6. Management decided at the end of 20X8 to pay $.08 per share common dividends. Calculate the preferred dividends that would be paid during 20X8. Prepare journal entries for recording the declaration and payment of preferred and common dividends. Assume no preferred or common shares were issued or purchased during 20X7 or 20X8.

Suppose 20X8 net income was $500,000. Compute the 20X8 ending balance in the Retained Earnings account

Answer 1

Note that , Dividends Shall not be paid on Treasury Stock. Calculation of Preferred Dividends that would be paid during 20X8: For Year 20X7 = (54749-6008) x $10 x 6% = $ 29,244.60 For Year 20X8 = (54749-6008) x $10 x 6% = $ 29,244.60 Total Preferred Dividends Paid on 20x8 = $ 58,489.20

Journal Entries Date Account Title and Explaination Debit Credit Post. Ref. 20X8 $ 179,370.08 Retained Earnings Dividends Payable - Preferred Dividends Payable - Common (1520320-9309)x$0.08 (To record Declaration of Dividends on Preferred and Common stock) 58,489.20 120,880.88 $ 20X8 $ $ 58,489.20 120,880.88 Dividends Payable - Preferred Dividends Payable - Common Cash (To record Payment of Dividends) $ 179,370.08

Computation of Ending Balance of Retained Earnings for 20X8: Balance of Retained Earnings at Beginning $ 2,463,951.00 Add: Net Income 500,000.00 2,963,951.00 Less: Preferred Dividends (58,489.20) Less: Common Stock Dividends (120,880.88) Ending Balance of Retained Earnings $ 2,784,580.92