Question

The books of Ivanhoe Corporation carried the following account balances as of December 31, 2020. Cash...

The books of Ivanhoe Corporation carried the following account balances as of December 31, 2020.

Cash $ 191,000
Preferred Stock (6% cumulative, nonparticipating, $50 par) 292,000
Common Stock (no-par value, 324,000 shares issued) 1,620,000
Paid-in Capital in Excess of Par—Preferred Stock 135,000
Treasury Stock (common 2,700 shares at cost) 36,100
Retained Earnings 98,900


The company decided not to pay any dividends in 2020.

The board of directors, at their annual meeting on December 21, 2021, declared the following: “The current year dividends shall be 6% on the preferred and $0.50 per share on the common. The dividends in arrears shall be paid by issuing 1,460 shares of treasury stock.” At the date of declaration, the preferred is selling at $80 per share, and the common at $12 per share. Net income for 2021 is estimated at $75,900.

(a) Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 3,487.)

Account Titles and Explanation

Debit

Credit

For preferred dividends in arrears:

For preferred current year dividend:

For common share dividend:


(b) Could Ivanhoe Corporation give the preferred stockholders 2 years’ dividends and common stockholders a 50 cents per share dividend, all in cash?

NoYes

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Homework Answers

Answer #1

a.

Account Titles and Explanation Debit Credit
For preferred dividends in arrears:
Retained earnings 17520
Treasury stock 17520
For preferred current year dividends:
Retained earnings 17520
Cash 17520
For common share dividend:
Retained earnings 96828
Cash 96828

Working:

Preferred dividend in arrears = 6% * $292,000 = $17,520

Current year preferred dividend = 6% * $292,000 = $17,520

Common dividend = $0.50 * (324,000 - 2,700 + 1460) = $0.30 * 322,760 = $96,828

b. Yes

Total dividend payable = 17520 + 17520 + 96828 = 131868

Available cash balance = 191000

Since available cash balance is more, the dividend can be paid in cash

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