Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 11-8

5. No entry required except for a memorandum type entry. The par value per share is reduced to one-half of what it was (from $10 per share to $5 per share) and the number of shares are doubled. Thus, the authorized number increases to 400,000, the issued number increases to 160,000, and the number of treasury shares increases to 4,000 shares.

ILLUSTRATION 11-5 STEPS IN ALLOCATING DIVIDENDS TO PREFERRED AND COMMON STOCKHOLDERS (L.O. 1)

Step 1: Assign arrearage to preferred, if any.

If there are any dividends in arrears, the amount of arrearage is first allocated to the preferred stockholders. The remaining amount of dividends to be allocated is computed. (If the amount declared is not enough to cover the arrearage, all dividends declared go to preferred holders, the remaining arrearage is computed for disclosure, and the rest of the steps are not performed.)

Step 2: Assign current period preference to preferred.

The amount of the preferred stockholders' current year preference is computed and that amount is allocated to the preferred holders. The remaining amount of dividends to be allocated is computed. (If the dividends declared are not enough to cover ...