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    The payment of dividends

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    Commmon and preferred stock-issuances and dividends. Permabilt Corp. was incorporated on January 1, 2003, and issued the following stock, for cash:

    1,200,000 shares of no-par common stock were authorized; 350,000 shares were issued on January 1, 2003, at $23 per share.

    400,000 shares of $100 par value, 10.5% cumulative, preferred stock were authorized, and 140,000 shares were issued on January 1, 2003, at $132 per share.

    Net income for the years ended December 31, 2003, 2004, and 2005, was $5,250,000, $7,450,000, and $8,700,000, respectively.

    No dividends were declared or paid during 2003 or 2004.

    However, on December 17, 2005, the board of directors of Permabilt Corp. declared dividends of $6,200,000, payable on February 9, 2006, to holders of record as of January 4,2006.

    Required:
    a. Use the horizontal model (or write the entry) to show the effects of:

    1. The issuance of common stock and preferred stock on January 1, 2003.

    2. The declaration of dividends on December 17, 2005.

    3. The payment of dividends on February 9, 2006.

    b. Of the total amount of dividends declared during 2005, how much will be received by preferred shareholders?

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    Solution Preview

    a. Use the horizontal model (or write the entry) to show the effects of:

    1. The issuance of common stock and preferred stock on January 1, 2003.

    The Journal Entries are:

    Jan 1: Cash 8,050,000 (=350,000*23)
    Common Stock 8,050,000
    Jan 1: Cash 18,480,000 (=140,000*132)
    Preferred ...

    Solution Summary

    The payment of dividends is examined.

    $2.19