Acct 387

(Chap. 19) Example Questions Solution

Part I. Multiple Choice (Circle the Best Answer) 2 points each 1. Which of the following statements about property dividends is NOT true? a. A property dividend is a nonreciprocal transfer of nonmonetary assets.

b. A property dividend is also called a liquidating dividend.

c. The accounting for a property dividend should be based on the market value of the nonmonetary assets transferred. d. A property dividend reduces retained earnings 2. Which of the following statements about scrip dividends is NOT true? a. A dividend payable in scrip means that instead of paying the dividend now, the corporation elected to pay it at some later date. b. When the dividend is paid, the company should credit cash. c. When the dividend is declared, the company should record an increase in liabilities

d. Interest is not usually paid on scrip dividends

3. Palmer Corp. owned 20,000 shares of Didde Corp. purchased in 1994 for $400,000. On December 15, 1998, Palmer declared a normal property dividend of all of its Didde Corp. shares on the basis of one share of Didde for every 10 shares of Palmer common stock held by its stockholders. The property dividend was distributed on January 15, 1999. On the declaration date, the aggregate market price of the Didde shares held by Palmer was $240,000. Proper recording of the effects of this event in Palmer's accounts would include: a. debit to Retained Earnings of $240,000 for the amount of the dividend. b. a credit to a gain account of $160,000. c. credit to property dividends payable of $400,000. d. credit to property dividends payable of $240,000. e. Both a and d are correct. 4. Stine Co. had outstanding 2,000 shares of $100 par value 8% cumulative preferred stock and 30,000 shares of $5 par value common stock on December 31, 1998. At December 31, 1998, dividends in arrears on the preferred stock were $6,000. Cash dividends declared in 1999 totaled $30,000. The amounts paid to each class of stock were Preferred Stock Common Stock a. $8,000 $22,000 b. $16,000 $14,000

c.
d.

$22,000
$24,000

$8,000

$6,000

-OVER-

Part II. Short answer:

(7 points)

The stockholders' equity section of Porter Corporation's balance sheet as of December 31, 1998 is as follows: Stockholders' Equity Current After Common stock, $10 par value; authorized 2,000,000 shares; issued and outstanding _200,000/_400,000_ shares $2,000,000 $4,000,000 Paid-in capital in excess of par 4,000,000 4,000,000 Retained earnings 5,000,000 3,000,000 Total Stockholders' Equity $11,000,000 $11,000,000 The management of Porter Corporation is concerned that the current market value per share of Porter common stock, which is $60 per share, is beyond the reach of many small investors. Management indicates that they would much prefer to have the stock trade for a price of around $30 per share. Additionally, Porter is getting a lot of pressure from shareholder's to declare a cash dividend given the current $5,000,000 retained earnings balance. Porter really doesn't want to distribute cash or any other of the corporation's assets to shareholders at this time, because of future expansion plans. Management is wondering if they could declare and distribute some type of dividend or stock split that would alleviate the above concerns? What would you suggest and why? (4 points) Declaration of a 100% stock dividend would appear to be the best alternative. This would double the number of shares outstanding to 400,000 and should drop the market price of the stock to approximately 1/2 of what it was (i.e., from $60 to $30 per share). It would also result in the capitalization (i.e., transfer from retained earnings to contributed equity) of $10 of par value for every share given as a dividend, which in this case would reduce retained earnings a total of $2,000,000 (200,000 shs. X $10). Another acceptable alternative would be to declare a 2 for 1 stock split to reduce the market price to $30. Then an appropriation of retained earnings for plant expansion could be used to reduce the retained earnings balance available for dividends. Assuming management implements what you suggest, complete the after column of the above stockholder's equity section to show what the new dollar amounts would be. (2 points). Additionally, indicate the number of shares issued and outstanding current/after in the space provided above (1 point).