Question

1. Prepare the journal entry to record Tamas Company’s issuance of 5,000 shares of \(100 par value, 7% cumulative preferred stock for \)102 cash per share.

2. Assuming the facts in part 1, if Tamas declares a year-end cash dividend, what is the amount of dividend paid to preferred shareholders? (Assume no dividends in arrears)

Short answer

1. Cash is debited by $510,000; Preferred stock and Paid-in capital are credited by $500,000 and $10,000.
2. The amount of dividend paid to preferred shareholders is $35,000.

Step-by-step solution

Meaning of Preference Stock

Preference stocks are those held by a preferred stockholder and have different features not possessed by common stock, like payment of dividend preference given to the preferred stockholder.

Journal entry

Date	Account and Explanation	Debit ($)	Credit ($)
	Cash	510,000
	Preferred Stock, $100 Par Value		500,000
	Paid-In Capital in Excess of Par Value,Preferred stock		10,000
	(To record Issuance of preferred stock for cash)

Amount of dividend paid to preferred shareholders          

Amount of Preferred Dividend

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{v}\mathbf{i}\mathbf{d}\mathbf{e}\mathbf{n}\mathbf{d}\mathbf{p}\mathbf{a}\mathbf{y}\mathbf{a}\mathbf{b}\mathbf{l}\mathbf{e}\mathbf{=}\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{p}\mathbf{r}\mathbf{e}\mathbf{f}\mathbf{e}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{d}\mathbf{s}\mathbf{h}\mathbf{a}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{\times }\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{\times }\mathbf{d}\mathbf{i}\mathbf{v}\mathbf{i}\mathbf{d}\mathbf{e}\mathbf{n}\mathbf{d}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{e}\\ \mathbf{=}\mathbf{\$}\mathbf{5000}\mathbf{\times }\mathbf{100}\mathbf{\times }\mathbf{7}\mathbf{\%}\\ \mathbf{=}\mathbf{\$}\mathbf{35}\mathbf{,}\mathbf{000}\end{array}$

Thus, the amount of dividend paid to preferred shareholders is $35,000.