Answered Essay: Hansen Co. began business in Year1. Hansen, Co. showed the following stockholders equity section at Decembe

Hansen Co. began business in Year1. Hansen, Co. showed the following stockholders equity section at December 31, Year2 (with certain information missing). All accounts have normal balances. Preferred stock, 6%, cumulative, par $50 10,000 shares authorized, ??? shares issued and outstanding $ 50,000 Common stock , par ??? 80,000 shares authorized 30,000 shares issued and 28,000 shares outstanding $ 300,000 Contributed capital in excess of par, common stock $ 510,000 Retained earnings $ 682,000 Treasury stock (common) $ 40,000 Assuming Hansen did not pay dividends in Year1, what amount of dividends were declared for the preferred shareholders in Year2? (The common shareholders received a $2 per share dividend for Year2.) If Hansen had a 2 for 1 common stock split on January 1, Year3, the balance in the Common Stock account would be what amount?

Expert Answer

 

Hansen Co.

Preferred stock, 6%, cumulative, par $50 10,000 shares authorized, 1000 ( $ 50000 / $ 50 par ) shares issued and outstanding – $ 50,000

Common stock , par $ 10 ( 300000 / 30000 ) 80,000 shares authorized 30,000 shares issued and 28,000 shares outstanding $ 300,000

Note :- Issued shares are taken for calculating par value or issue price. Outstanding shares are taken for calculating dividend.

Contributed capital in excess of par, common stock – $ 510,000

Retained earnings – $ 682,000

Treasury stock (common) – $ 40,000

Q. Assuming Hansen did not pay dividends in Year1, what amount of dividends were declared for the preferred shareholders in Year2? (The common shareholders received a $2 per share dividend for Year2.)

Dividends that were declared for the preferred shareholders in Year2 = 1000 shares * $ 50 * 6 % dividend rate * 2 years ( since Preferred stock is cumulative ) = $ 6000

Moreover, it is given in the information that ” The common shareholders received a $2 per share dividend for Year2 ” which shows that sufficient dividends were distributed because when a dividend is declared then priority is given to Preferred stockholders and if Preferred stock is cumulative in nature then first priority is given to dividend in arrears.

Q. If Hansen had a 2 for 1 common stock split on January 1, Year3, the balance in the Common Stock account would be what amount?

balance in the Common Stock account :- $ 300000 only

A change in the memorandum will be made :-

No. of authorised shares = 80000 * 2 = 160000 shares

No. of issued shares = 30000 * 2 = 60000 shares

And par value = 10 / 2 = $ 5 per share

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