Question

Hodge Corporation issued 100,000 shares of $20 par value, cumulative, 6% preferred stock on January 1,2014, for $2,300,000. In December 2016, Hodge declared its first dividend of $500,000.

Instructions:
(1) Prepare Hodge's journal entry to record the issuance of the preferred stock.
(b) If the preferred stock is NOT cumulative, how much of the $500,000 would be paid to COMMON stockholders?
(c) If the preferred stock is cumulative, how much of the $500,000 would be paid to COMMON Stockholders?

Answer 1

To record the issuance of preferred stock, debit Cash for the amount received and credit Preferred Stock and Additional Paid-in Capital—Preferred Stock. In a non-cumulative preferred stock, common stockholders would not receive any of the dividend. In a cumulative preferred stock, common stockholders would receive the dividend only after preferred stockholders have been paid.

Step-by-step explanation:

To record the issuance of the preferred stock, you would debit Cash for $2,300,000 and credit Preferred Stock for $2,000,000 (100,000 shares × $20 par value), and Additional Paid-in Capital—Preferred Stock for $300,000 (the excess of the cash collected over the par value of the stock).

(b) If the preferred stock is NOT cumulative, none of the $500,000 dividend would be paid to common stockholders. Preferred stockholders have priority over common stockholders when it comes to receiving dividends.

(c) If the preferred stock IS cumulative, the $500,000 dividend would be paid to common stockholders ONLY AFTER the preferred stockholders have been paid their dividends. If there is any remaining cash after paying the preferred stockholders, it will be distributed to the common stockholders as dividends.

Answer 2

The journal entry to record the issuance of the preferred stock is Preferred Stock: $2,000,000, Common Stock: $300,000, Paid-in Capital in Excess of Par: $2,000,000, and Cash: $2,300,000. If the preferred stock is not cumulative, none of the $500,000 dividend would be paid to common stockholders. If the preferred stock is cumulative, first the preferred stockholders must be paid their dividends in arrears, and the remaining dividend amount would then be paid to common stockholders.

Step-by-step explanation:

(1) To record the issuance of the preferred stock, the journal entry would be:

Preferred Stock 2,000,000

Common Stock 300,000

Paid-in Capital in Excess of Par 2,000,000

Cash 2,300,000

(b) If the preferred stock is NOT cumulative, none of the $500,000 dividend would be paid to common stockholders. All of the dividend would be paid to preferred stockholders.

(c) If the preferred stock is cumulative, first the preferred stockholders must be paid their dividends in arrears. The remaining dividend amount would then be paid to common stockholders.