Presented below is the stockholders’ equity section of the balance sheet of K-Drama Corporation at December 31, 2019.
K-Drama Corporation: Stockholders’ Equity
December 31, 2019
7% Cumulative preferred stock, $50 par value,
2,0000,000 shares authorized, 800,000 shares
issued and outstanding $ 40,000,000
Common stock, $5 par value, 5,000,000 shares authorized,
4,000,000 shares issued and outstanding 20,000,000
Additional paid in capital: preferred 2,400,000
Additional paid in capital: common 44,000,000
Retained earnings. 71,800,000
Total stockholders’ equity $178,200,000
a. Compute the average issuance price per share of the preferred stock.
b. At December 31, 2019, K-Drama Corporation reported retained earnings of $71,800,000 in its balance sheet. Does K-Drama Corporation have $71,800,000 of cash set aside for future use? Explain.
c. What events will cause K-Drama’s retained earnings to increase? What will cause it to decrease? Be specific.
d. Compute the annual dividend requirement on the preferred stock.
e. At January 1, 2019, there were dividends in arrears on the preferred stock because K-Drama skipped the payment of preferred dividends in 2018. On December 1, 2019, K-Drama Corporation declared total cash dividends of $7,200,000 to stockholders of record on December 15, 2019, payable on December 31, 2019. Compute the dividend per share received by the common stockholders in 2019.
f. Prepare the required journal entries, if any, to record the dividend on each of the following dates: December 1, 2019, December 15, 2019, and December 31, 2019.
g. Suppose that on December 15, 2019, K-Drama declared a 5% stock dividend on common stock only instead of cash dividend. K-Drama is a Korean company which should follow the Korean corporate law in accounting for stock dividends. Prepare the required journal entries, if any, to record the stock dividend on each of the following dates: December 1, 2019, December 15, 2019, and December 31, 2019.
|a.||Average issuance price per share of the preferred stock=(Par value of preferred stock+Additional paid in capital preferred)/Preferred shares outstanding|
|Average issuance price per share of the preferred stock=(40000000+2400000)/800000=$ 53|
|b.||K-Drama Corporation does not have $71,800,000 of cash set aside for future use|
|It is because retained earnings consist of net income which is computed based on accrual basis and not on cash basis.|
|Increase-Net income for the year|
|d.||Annual dividend requirement on the preferred stock=Preferred shares outstanding*Par value*Preferred stock %=800000*50*7%=$ 2800000|
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