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Chapter 15: Question 26Q (page 810)

This comment appeared in the annual report of MacCloud Inc.: “The Company could pay cash or property dividends on the Class A common stock without paying cash or property dividends on the Class B common stock. But if the Company pays any cash or property dividends on the Class B common stock, it would be required to pay at least the same dividend on the Class A common stock.” How is a property dividend accounted for in the financial records?

Short Answer

Expert verified

According to Generally Accepted Accounting Principles, property dividends must be reported at fair market value, often not the same as the asset's net book value.

Step by step solution

01

Meaning of Property Dividend

A property dividend is a type of dividend that substitutes property for cash or stock dividends. Despite being a non-monetary payout, property dividends have monetary worth.

02

Explaining Property Dividends financial record

A non-reciprocal transfer of non-monetary assets between a firm and its owners is known as a property dividend. A non-reciprocal transfer of a non-monetary asset to a stockholder or another entity should be reported at the fair value of the item transferred,with a gain or loss recognized at the asset's disposal.

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Most popular questions from this chapter

(Recording the Issuance of Common and Preferred Stock) Kathleen Battle Corporation was organized on January 1, 2017. It is authorized to issue 10,000 shares of 8%, \(100 par value preferred stock, and 500,000 shares of no-par common stock with a stated value of \)1 per share. The following stock transactions were completed during the first year.

Jan. 10 Issued 80,000 shares of common stock for cash at \(5 per share.

Mar. 1 Issued 5,000 shares of preferred stock for cash at \)108 per share.

Apr. 1 Issued 24,000 shares of common stock for land. The asking price of

the land was \(90,000; the fair value of the land was \)80,000.

May 1 Issued 80,000 shares of common stock for cash at \(7 per share.

Aug. 1 Issued 10,000 shares of common stock to attorneys in payment of

their bill of \)50,000 for services rendered in helping the company

organize.

Sept. 1 Issued 10,000 shares of common stock for cash at \(9 per share.

Nov. 1 Issued 1,000 shares of preferred stock for cash at \)112 per share.

Instructions

Prepare the journal entries to record the above transactions.

Washington Company has the following stockholders’ equity accounts at December 31, 2017.

Common Stock (\(100 par value, authorized 8,000 shares) \)480,000

Retained Earnings 294,000

Instructions

a. Prepare entries in journal form to record the following transactions, which took place during 2018.

1. 280 shares of outstanding stock were purchased at \(97 per share. (These are to be accounted for using the cost method.)

2. A \)20 per share cash dividend was declared.

3. The dividend declared in (2) above was paid.

4. The treasury shares purchased in (1) above were resold at \(102 per share.

5. 500 shares of outstanding stock were purchased at \)105 per share.

6. 350 of the shares purchased in (5) above were resold at \(96 per share.

b.Prepare the stockholders’ equity section of Washington Company’s balance sheet after giving effect to these transactions, assuming that the net income for 2018 was \)94,000. State law requires restriction of retained earnings for the amount of treasury stock.

(Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling \(4,200,000.

Jana Kingston Co.

Current liabilities

\) 300,000

Long-term debt, 10%

1,200,000

Common stock (\(20 par)

2,000,000

Retained earnings (Cash dividends, \)328,000)

700,000

\(4,200,000

Mary Ann Benson Co.

Current liabilities

\) 600,000

Common stock (\(20 par)

2,900,000

Retained earnings (Cash dividends, \)328,000)

700,000

\(4,200,000

For the year, each company has earned the same income before interest and taxes.

Jana Kingston Co.

Mary Ann Benson Co.

Income before interest and taxes

\)1,200,000

\(1,200,000

Interest expense

120,000

0

1,080,000

1,200,000

Income taxes (45%

486,000

540,000

Net income

\) 594,000

\( 660,000

At year end, the market price of Kingston’s stock was \)101 per share, and Benson’s was $63.50.

Instructions

  1. Which company is more profitable in terms of return on total assets?
  2. Which company is more profitable in terms of return on common stockholders’ equity?
  3. Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.
  4. From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why?
  5. What is the book value per share for each company?

(Preferred Stock Dividends) Cajun Company has outstanding 2,500 shares of \(100 par, 6% preferred stock and 15,000 shares of \)10 par value common. The following schedule shows the amount of dividends paid out over the last 4 years.

Instructions

Allocate the dividends to each type of stock under assumptions (a) and (b). Express your answers in per share amounts using the format shown below

Assumptions

(a)

Preferred, noncumulative

And nonparticipating

(b)

Preferred, cumulative, and fully participating

Year

Paid-out

Preferred

Common

Preferred

Common

2012

\(13,000

2013

\)26,000

2014

\(57,000

2015

\)76,000

(Issuance of Stock for Land) Martin Corporation is planning to issue 3,000 shares of its own $10 par value common stock for two acres of land to be used as a building site.

Instructions

  1. What general rule should be applied to determine the amount at which the land should be recorded?
  2. Under what circumstances should this transaction be recorded at the fair value of the land?
  3. Under what circumstances should this transaction be recorded at the fair value of the stock issued?
  4. Assume Martin intentionally records this transaction at an amount greater than the fair value of the land and the stock. Discuss this situation.
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