Regulation 3 PassMaster Questions

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Unformatted text preview: 1 Released 2007 Page 39 A corporation that has both preferred and common stock has a deficit in accumulated earnings and profits at the beginning of the year. The current earnings and profits are $25,000. The corporation makes a dividend distribution of $20,000 to the preferred shareholders and $10,000 to the common shareholders. How will the preferred and common shareholders report these distributions? a. b. c. d. Preferred - $20,000 dividend income; common - $10,000 dividend income. Preferred - $20,000 dividend income; common - $5,000 dividend income, $5,000 return of capital. Preferred - $15,000 dividend income; common - $10,000 dividend income. Preferred - $20,000 return of capital; common - $10,000 return of capital. CPA-05531 Explanation Choice "b" is correct. A dividend to a preferred shareholder is based on that shareholder's fixed percentage at purchase. Preferred shareholders are not common equity owners of a corporation, and they only get paid based on their preferred percentage; therefore, any divid...
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This note was uploaded on 06/14/2013 for the course ACCOUNTING Regulation taught by Professor Becker during the Fall '10 term at Keller Graduate School of Management.

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