Question

Cash dividends and two classes of stock. Googelie Inc. has two classes of capital stock outstanding:...

Cash dividends and two classes of stock. Googelie Inc. has two classes of capital stock outstanding: 45,000 shares of 8%, $100 par value cumulative preferred and 25,000 shares of $10 par value common. The company had a deficit (negative balance in retained earnings) of $230,000 at the beginning of the current year, and preferred dividends were two years in arrears. During the current year, the company earned net income of $1,735,000. What will be the balance in the Retained Earnings account at the end of the current year if the company takes all the actions necessary to pay a dividend of $1.50 per share on the common stock?

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Answer #1
Total Preference dividend paid:
Prefered stcok capital 4,500,000
Annual dividend rate 8%
Annual dividend amount 360,000
Arrears for last 2 years
Therefore, Prefered dividend to be paid for 3 years
Total prefered dividend paid 1080000
(360000*3)
Common Dividend paid 37500
(25000 shares @ 1.50 pere share)
Balance in Retained earnings at the end:
Beginning balance in RE -230000
(as having debit balance)
Add: Net income 1735000
1505000
Less: Dividend paid:
Prefered dividend 1,080,000
Cmmon Dividend 37,500
Balance in Retained earnings at end 387,500
Therefore,
Balance in Retained earnings at end : $ 387500 (Credit balance)
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