Final answer:
The journal entry to record the issuance of Hodge's preferred stock would debit Cash and credit Preferred Stock and Additional Paid-in Capital. If the stock is not cumulative, $625,000 of the $700,000 dividend would go to common stockholders. If it is cumulative, common stockholders would receive $400,000 of the declared dividend.
Step-by-step explanation:
The student's question pertains to the issuance of preferred stock and the allocation of dividends in two scenarios: non-cumulative and cumulative preferred stock.
Issuance of Preferred Stock:
To prepare Hodge's journal entry to record the issuance of the preferred stock, the entry on January 1, 2019, would be:
Debit Cash $2,500,000
Credit Preferred Stock (50,000 shares x $30 par value) $1,500,000
Credit Additional Paid-in Capital on Preferred Stock $1,000,000
Non-cumulative Preferred Stock:
If the preferred stock is non-cumulative, the preferred stockholders are entitled to receive 5% of the par value per share before any dividends are paid to common shareholders. The dividend for preferred shareholders would be 50,000 shares x $30 par value x 5% = $75,000. Since the company declared a dividend of $700,000, the remainder, $625,000 ($700,000 - $75,000), would be available for the common shareholders.
Cumulative Preferred Stock:
If the preferred stock is cumulative, the preferred stockholders are entitled to receive their dividends in arrears before any dividends are paid to common shareholders. Since this is the first dividend since 2019, they would be entitled to receive the dividend for four years (2019, 2020, 2021, and 2022), which would be 4 x $75,000 = $300,000. As a consequence, the dividend paid to common shareholders from the $700,000 declared would be reduced to $400,000 ($700,000 - $300,000).