Question

Company has 10,000 shares of $100 par value 8% preferred stock and 50,000 shares of $10 par value common stock outstanding at Dec 31st 2019.
(a) If the preferred stock is CUMULATIVE and dividends were last paid Dec 31st 2016. If Glenny declares a $425,000 dividend, record the entry for the declaration of the dividend on Dec 31, 2019 for both the Preferred and shared stock.

Answer 1

Answer:

31st Dec 2019

Dr Retained Earnings                                                             425,000

Cr Dividend Payable- cumulative preferred stock              240,000

Cr Dividend Payable - common stock                                  185,000

( to record dividend declaration paid in 31st Dec 2019)

Explanation:

Cumulative preferred stock is stock that has specific dividend payment promised by firm and has the right to receive dividend ( once it is paid out) before common stock.

As the last time the firm paid dividend is 31st Dec 2016, the dividend in-arrears for cumulative stock accounting to 3 years or $240,000, that is, to be calculated as 3 x dividend paid out per year = 3 x 100 x 10,000 x 8% = $240,000.

Thus, as firm declares $425,000 dividend payment, $240,000 must go to cumulative stock holders before the remaining $185,000 (425,000-240,000) goes to common stock holders.