PRACTICE QUESTIONS ON SHAREHOLDERS’ EQUITY
1. Thompson Industries Ltd. has faced significant cash flow problems during 1997 and 1998, and has not paid any dividends on any shares during this period. There has been no change in the number of shares outstanding for many years. The share capital at the end of 1999 is as follows:
Preferred Class A shares
2,000 shares, stated value of $200, 5% non-cumulative dividend
Preferred Class B shares
5,000 shares, stated value of $100, $3.50 cumulative divided
a) Calculate the dividends payable to each class of shares if the Board of Directors were to declare dividends of $2.75 per common share.
b) Calculate the dividends payable to each class of share and the dividend per common share if the Board of Directors were to declare total dividends of $72,500.
2. At the start of ...view middle of the document...
Prepare the journal entries to record the three share transactions during the year.
3. Selma Inc. has the following shares outstanding at December 31, 1998:
12,000 Common shares, total proceeds were $60,000
2,000 Class A Preferred shares, par value $100, $3 cumulative dividend
2,000 Class B Preferred shares, par value $200, 4% non-cumulative dividend
Selma has not declared any dividends during the last two years, as all internally generated funds were used for a plant expansion. No new shares were issued during this period.
1) On December 15, 1998 Selma declared dividends of $52,000. Calculate the total dividends paid to Class A and B Preferred shareholders, and the per share dividend on each common share.
2) Prepare the journal entry to record the dividends declared.
3) Calculate the total dividends declared if the board of directors had decided on a dividend of $5 per common share.
4. Louise Ltd. has the following shares outstanding on January 1, 1998:
Quantity $ Amount
Class A preferred, $100 face value,
5% cumulative dividend 1,000 $100,000
Class B preferred, $100 face value,
$6.50 noncumulative dividend 1,000 100,000
Common shares 10,000 420,000
On June 30, 1998, Louise Ltd. declared total dividends of $25,000. No dividends had been declared in 1997, but in all years prior to 1997, dividends had been declared and paid. On July 20, 1998 all dividends declared were paid. On December 5, 1998, Louise Ltd. purchased 300 common shares on the stock market at a cost of $62 per share. This was the first time Louise Ltd. has ever purchased its own stock, and the shares were immediately canceled. (NOT treasury stock).
a) Calculate the dividends payable to each class of shares, and the dividend paid per common share.
b) Prepare all the necessary journal entries for 1998 to record the purchase of shares.
5. Common shares are often referred to as residual shares. Explain what is meant by this term, and describe the risk and opportunity to an investor from the purchase of common shares.