ch15 - CHAPTER 15-Corporations: Dividends, Retained...

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Unformatted text preview: CHAPTER 15-Corporations: Dividends, Retained Earnings, & Income Reporting ANSWERS TO QUESTIONS 1. (a) A dividend is a distribution by a corporation to its stockholders on a pro rata (proportional) basis. (b) Disagree. Dividends may take four forms: cash, property, scrip (promissory note to pay cash), or (capital) stock. 2. Mike is not correct. Adequate cash is only one of the conditions. In order for a cash dividend to occur, a corporation must also have retained earnings and the dividend must be declared by the board of directors. 3. (a) The three dates are: Declaration date is the date when the board of directors formally declares the cash dividend and announces it to stockholders. The declaration commits the corporation to a binding legal obligation that cannot be rescinded. Record date is the date that marks the time when ownership of the outstanding shares is determined from the stockholder records maintained by the corporation. The purpose of this date is to identify the persons or entities that will receive the dividend. Payment date is the date on which the dividend checks are mailed to the stockholders. (b) The accounting entries and their dates are: Declaration dateDebit Retained Earnings and Credit Dividends Payable. Payment dateDebit Dividends Payable and Credit Cash. No entry is made on the record date. 4. The allocation of the cash dividend is as follows: Total dividend ............................................................................... $40,000 Allocated to preferred stock Dividends in arrearsone-year............................................. $12,000 Current year dividend............................................................ 12,000 24,000 Remainder allocated to common stock ......................................... $16,000 5. A cash dividend decreases assets, retained earnings, and total stockholders equity. A stock divi- dend decreases retained earnings, increases paid-in capital, and has no effect on total assets and total stockholders equity. 6. A corporation generally issues stock dividends for one of the following reasons: (1) To satisfy stockholders dividend expectations without distributing cash. (2) To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes the shares easier to purchase for smaller investors. (3) To emphasize that a portion of stockholders equity that had been reported as retained earn- ings has been permanently reinvested in the business and therefore is unavailable for cash dividends. 7. In a stock split, the number of shares is increased in the same proportion that par value is de- creased. Thus, in the Noriega Corporation the number of shares will increase to 40,000 = (20,000 X 2) and the par value will decrease to $5 = ($10 2). The effect of a split on market value is gener- ally inversely proportional to the size of the split. In this case, the market price would fall to approx- imately $70 per share ($140 2). 8.8....
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This note was uploaded on 03/13/2012 for the course ACCOUNTING 100 taught by Professor Boyle during the Fall '11 term at Seton Hill.

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ch15 - CHAPTER 15-Corporations: Dividends, Retained...

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