PA11-4 Comparing Stock and Cash Dividends [LO2, LO3, LO4]
Ritz Company had the following stock outstanding and Retained earnings at December 31, 2010:
Common stock (par $1; outstanding, 500,000 shares) $ 500,000
Preferred stock, 8% (par $10; outstanding, 21,000 shares) 210,000
Retained earnings 900,000
On December 31, 2010, the board of directors is considering the distribution of a cash dividend to the common and preferred stockholders. No dividends were declared during 2008 or 2009. Three independent cases are assumed:
Case A:
The preferred stock is noncumulative; the total amount of 2010 dividends would be $30,000.
Case B:
The preferred stock is cumulative; the total amount of 2010 dividends would be $30,000. Dividends were not in arrears prior to 2008.
Case C: Same as Case B, except the amount is $75,000.
Requirement 1:
(a)
Compute the amount of dividends, in total, payable to each class of stockholders for each case. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
Case A Case B Case C
Preferred $ $ $
Common
Total $ $ $
(b)
Compute the amount of dividend per share, payable to each class of stockholders for each case. (Round the "per share" amounts to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
Case A Case B Case C
Preferred $ $ $
Common $ $ $
Requirement 2:
On case C, assume that the company issued a 100 percent stock dividend on the outstanding common shares when the market value per share was $50. Complete the following comparative schedule. (Input all amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
Schedule of Comparative Differences
Amount of Dollar Increase (Decrease)
Item Case C (Cash Dividend) Stock Dividend
Assets $ $
Liabilities $ $
Stockholders' equity $ $
5432
uyguk
To solve this problem, we need to calculate the amount of dividends payable to each class of stockholders in three different cases - Case A, Case B, and Case C.
Requirement 1:
(a)
To calculate the amount of dividends payable to each class of stockholders for each case:
- For preferred stockholders in Case A, the total amount of dividends would be $30,000.
- For preferred stockholders in Case B, the total amount of dividends would be $30,000 if dividends were not in arrears prior to 2008.
- For preferred stockholders in Case C, the total amount of dividends would be $75,000 if dividends were not in arrears prior to 2008.
Based on the information provided, we can calculate the dividends payable as follows:
Case A Case B Case C
Preferred $30,000 $30,000 $75,000
Common
Total $30,000 $30,000 $75,000
(b)
To calculate the amount of dividend per share payable to each class of stockholders for each case:
- Divide the total amount of dividends payable by the number of shares outstanding for each class of stock.
Based on the information provided, we can calculate the dividend per share as follows:
Case A Case B Case C
Preferred $1.43 $1.43 $3.57
Common $0 $0 $0
Requirement 2:
In Case C, assume that the company issued a 100 percent stock dividend on the outstanding common shares when the market value per share was $50.
To complete the comparative schedule, we need to calculate the amount of dollar increase or decrease in assets, liabilities, and stockholders' equity due to the stock dividend.
Based on the information provided, we can calculate the comparative differences as follows:
Schedule of Comparative Differences
Amount of Dollar Increase (Decrease)
Item Case C (Cash Dividend) Stock Dividend
Assets $0 $ (500,000 shares * $50 per share)
Liabilities $0 $0
Stockholders' equity $75,000 $ +(500,000 shares * $50 per share)