The effect of the declaration of a cash dividend by the board of directors is to

1)The effect of the declaration of a cash dividend by the board of directors is to         Increase                                  Decrease        (a) Stockholders’ equity                      Assets (b)Assets                                            Liabilities (c) Liabilities                            Stockholders’ equity (d) Liabilities                                       Assets 2) Solaris, Inc. has 2,000 shares of 5%, $10 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2017. What is the annual dividend on the preferred stock? (a)$10,000 in total (b)$5 per share (c)$1,000 in total (d) $.05 per share 3) Rendezvous, Inc. has 10,000 shares of 5%, $100 par value, noncumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2017. There were no dividends declared in 2016. The board of directors declares and pays a $110,000 dividend in 2017. What is the amount of dividends received by the common stockholders in 2017? (a)$50,000 (b)$0 (c) $110,000 (d)$60,000 4) Bodkin, Inc. has 5,000 shares of 5%, $100 par value, noncumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2016, and December 31, 2017. The board of directors declared and paid a $25,000 dividend in 2016. In 2017, $55,000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2017? Preferred                   Common (a) $35,000                 $20,000 (b)$27,500                  $27,500 (c) $0                          $55,000 (d) $25,000                 $30,000 5) Which of the following statements about dividends is not accurate? (a)Low dividends may mean high stock returns. (b)Many companies declare and pay cash quarterly dividends. (c)The board of directors is obligated to declare dividends. (d)A legal dividend may not be a feasible one. 6) Regular dividends are declared out of (a)paid-in Capital in Excess of Par. (b)treasury Stock. (c)common Stock. (d)retained Earnings. 7) Which of the following is not a significant date with respect to dividends? (a) The declaration date (b) The incorporation date (c)The record date (d) The payment date 8) Which of the following statements regarding the date of a cash dividend declaration is not accurate? (a) The corporation is committed to a legal, binding obligation. (b)The board of directors formally authorizes the cash dividend. (c)A liability account must be increased. (d) The dividend can be rescinded once it has been declared. 8) Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections: Total Assets                Total Liabilities            Total Stockholders’ Equity (a) Increase                Decrease                    No change (b)Decrease                No change                  Increase (c)Decrease                Increase                     Decrease (d) No change            Increase                     Decrease 9) Outstanding stock of the Crevusse Corporation included 40,000 shares of $5 par common stock and 20,000 shares of 5%, $10 par noncumulative preferred stock. In 2016, Crevusse declared and paid dividends of $8,000. In 2017, Crevusse declared and paid dividends of $24,000. How much of the 2017 dividend was distributed to preferred shareholders? (a) $14,000 (b)$8,000 (c)$10,000 (d) None of these answer choices are correct

Answer

General guidance

Concepts and reason
Dividend: It is the amount of income earned by the stockholders in return for their investment. It is the distribution of profits earned during a specified period. The payment is made generally in the form of cash. Dividend account is of a temporary nature. It is maintained until the dues have been cleared. Common stock: These are the shares that are issued by the company against the money invested by the shareholders in the company. The common stockholders are the real owners of the company; they have a right on the dividend that is distributed by the company. Preferred Stock: These are the stockholders that are given preference in terms of the dividend over the common stockholders. They receive a fixed amount of dividend as opposed to the common stockholders. They do not carry any right to vote in the general meetings of the company.

Fundamentals

Retained earnings: This is the amount, which is left after the distribution of dividends and proposed dividends to shareholders of the company from the opening balance of retained earnings and net income of the year. Liabilities: Liability is an obligation of any business. It is an amount borrowed by business from outsiders of the business is called liabilities. Creditors and owners are two groups who have claims to a company’s assets in lieu of the credit provided by them to the business. Assets: It can be defined as the resources owned by the organization which is capable of providing some future benefits. On the basis of duration of time assets are of two types which are 1. Current Assets 2. Fixed Assets Shareholders’ Equity: It can be referred to as one of the parts of the balance sheet other than the assets and the liabilities of the company. It is also known as owner’s equity of the company. Capital contributed and retained earnings are the parts of the owner’s equity.

Step-by-step

Step 1 of 5

1) When cash dividend will be declared by the board of directors, it will not result in the increase in stockholders’ equity and a decrease in the assets. The declaration of cash dividend would not result in an increase in the assets of the company and a decrease in the liabilities of the company. Further, due to the provided transaction, the liabilities of the company will get increased; however, the assets of the company will not decrease.

The declaration of cash dividends will not result in the increase of stockholders’ equity and a decrease in assets, because this transaction will decrease the retained earnings of the company. Accordingly, the assets will not increase and the liabilities will not decrease. Also, this transaction will increase the liabilities of the company, but the assets of the company will not decrease. This transaction will decrease the retained earnings of the company instead of its assets.

Step 2 of 5

The board of directors made a declaration of a cash dividend. This would result in an increase in liabilities and a decrease in the stockholders’ equity. The reason being, current liabilities of the company would increase in the form of a dividend payable and the stockholders’ equity of the company will decrease in the form of retained earnings.

Part 1

The declaration of a cash dividend by the board of directors will increase the liabilities and decrease the stockholders’ equity.


When a cash dividend is being declared by the board of directors, the retained of the company get decreased and the current liabilities of the company get increased. Retained earnings are basically a part of stockholders’ equity. Accordingly, stockholders’ equity will decrease. Further, the current liabilities of the company get increased in the form of dividends payable. Therefore, the liability of the company will be increased.

Step 3 of 5

2) Calculate the annual dividend on preferred stock, using the equation as shown below: Annual dividend = Value of cumulative preferred stock x Rate of dividend
=(2,000 shares x $10)x5%
= $20,000 x 5%
= $1,000

Part 2

The annual dividend on the preferred stock would be $1,000 in total.


In order to compute the annual dividend on preferred stock, the value of preferred stock shall have to be calculated by multiplying the number of shares with per share price. Accordingly, the value of the cumulative preferred stock would be $20,000. Further, this value of preferred stock shall have to be multiplied by the rate of dividend for determining the value of dividend on preferred stock. The rate of the preferred dividend is given 5%. Therefore, the value of annual dividend on the preferred stock will be $1,000 in total.

Step 4 of 5

3) Compute the amount of preferred dividends, using the equation as shown below: Dividend on preferred stock = Value of preferred stock x Rate of dividend
=(10,000 shares x $100)x5%
= $1,000,000x 5%
= $50,0 Hence, the amount of dividend on preferred stock would be $50,000.

For calculating the annual dividend on preferred stock, the value of preferred stock shall have to be calculated by multiplying the number of shares with the price of one share, which is given $100. Accordingly, the value of the noncumulative preferred stock would be $1,000,000. Then, this value of preferred stock will be multiplied by the rate of dividend for determining the value of dividend on preferred stock. The rate of the preferred dividend is given 5%. Thus, the value of annual dividend on the noncumulative preferred stock will be $50,000.

Step 5 of 5

Compute the amount of common dividends, using the equation as shown below: Dividend on common stock = Total Dividend - Preferred Dividend
=$110,000 - $50,000
= $60,000

Hence, the dividend amount received by the common stockholders will be $60,000.

Part 3

The dividend amount received by the common stockholders will be $60,000.


A total dividend of $110,000 was paid in the year 2017. It was calculated that the amount of the preferred dividend was $50,000. Accordingly, the remaining amount will be paid a dividend to the common stockholders. Therefore, the amount of dividend, which will be received by the common stockholders, is $60,000.

Answer

Part 1

The declaration of a cash dividend by the board of directors will increase the liabilities and decrease the stockholders’ equity.

Part 2

The annual dividend on the preferred stock would be $1,000 in total.

Part 3

The dividend amount received by the common stockholders will be $60,000.

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