Question

The records of Hoffman Company reflected the following balances in the stockholders' equity accounts at December 31, 2009:

Common stock, par $12 per share, 40,000 shares outstanding.
Preferred stock, 8 percent, par $10 per share, 6,000 shares outstanding.
Retained earnings, $220,000.

On January 1, 2010, the board of directors was considering the distribution of a $62,000 cash dividend. No dividends were paid during 2008 and 2009.

Answer 1

Given:

Common Stock:

Par value per share = $12

Shares outstanding = 40,000

Preferred Stock:

Par value per share = $10

Shares outstanding = 6,000

Dividend rate = 8%

Retained Earnings:

Balance = $220,000

Dividends Payable Calculation:

For Preferred Stock:

Dividend payable for preferred stock = Preferred stock par value * Preferred stock dividend rate * Preferred stock shares outstanding

Dividend payable for preferred stock = $10 * 8% * 6,000

Dividend payable for preferred stock = $480

For Common Stock:

Remaining cash dividend after paying the preferred stock dividend = Total cash dividend - Preferred stock dividend payable

Remaining cash dividend = $62,000 - $480

Remaining cash dividend = $61,520

To distribute the cash dividend, we need to reduce the Retained Earnings account by the total cash dividend of $62,000. However, since there is a remaining cash dividend of $61,520 after paying the preferred stock dividend, we can only distribute this amount to the common stockholders.

The journal entry to record the distribution of the cash dividend is as follows:

Retained Earnings $61,520

Dividends Payable $61,520