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Chapter 11: Q11-25Q (page 583)

In the extractive industries, businesses may pay dividends in excess of net income. What is the maximum permissible? How can this practice be justified?

Short Answer

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Answer

Maximum dividend permissible is the amount of accumulated net income (after depletion) plus the amount of depletion charged.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Dividends

A dividend is treated as profit, and retained earnings are distributed to shareholders according to their shares. A dividend is given to preferred and common stockholders, but preferred shareholders are given first preference.

02

Explaining maximum permissible net income and its justification.

The amount of cumulative net income (after depletion) plus the amount of depletion charged, is the maximum dividend that can be paid. Companies that plan to harvest natural resources rather than acquire more properties might justify this technique. In fact, such businesses are progressively dispersing their initial capital to investors.

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Most popular questions from this chapter

(Depreciation—Replacement, Change in Estimate) Greg Maddox Company constructed a building at a cost of \(2,200,000 and occupied it beginning in January 1998. It was estimated at that time that its life would be 40 years, with no salvage value.

In January 2018, a new roof was installed at a cost of \)300,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $160,000.

Instructions

  1. What amount of depreciation should have been charged annually from the years 1998 to 2017? (Assume straight-line depreciation.)
  2. What entry should be made in 2018 to record the replacement of the roof?
  3. Prepare the entry in January 2018 to record the revision in the estimated life of the building if necessary.
  4. What amount of depreciation should be charged for the year 2018?

(Depletion Computations—Timber) Forda Lumber Company owns a 7,000-acre tract of timber purchased in 2003 at a cost of \(1,300 per acre. At the time of purchase, the land was estimated to have a value of \)300 per acre without the timber. Forda Lumber Company has not logged this tract since it was purchased. In 2017, Forda had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2017, Forda built 10 miles of roads at a cost of \(7,840 per mile. After the roads were completed, Forda logged and sold 3,500 trees containing 850,000 board feet.

Instructions

  1. Determine the cost of timber sold related to depletion for 2017.
  2. If Forda depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 2017.
  3. If Forda plants five seedlings at a cost of \)4 per seedling for each tree cut, how should Forda treat the reforestation?

Question: Identify and explain the three types of classifications for investments in debt securities.

Last year, Wyeth Company recorded an impairment on an asset held for use. Recent appraisals indicate that the asset has increased in value. Should Wyeth record this recovery in value?

Question: Hayes Company sold 10,000 shares of Kenyon Co. commonstock for \(27.50 per share, incurring \)1,770 in brokeragecommissions. These securities originally cost $260,000.Prepare the entry to record the sale of these securities.
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