Accounting (Reporting and Analyzing Stockhold)?

Question

Question 1. If some amount of dividends were in arrears on preferred stock, how does that affect the balance reported for retained earnings? Do you deducted that amount or add from the retained earnings??

Question 2 On January 1, 2007, Kern Corporation had $1,560,900 of common stock outstanding that was issued at par and retained earnings of $732,400. The company issued 58,790 shares of common stock at par on July 1 and earned net income of $367,700 for the year.

Journalize the declaration of a 10% stock dividend on December 10, 2007, for the following two independent assumptions.

Par value is $10 and market value is $11.
For the journal entries . I got Retained Earnings Debit=$64669, Common Stock Dividends Distributable Credit=$58790,Paid-in Capital in Excess of Par Value Credit=$5879.

Did i do that right plz help!!

Answer 1

Qn 1
If a company has issued cumulative preferred stock and does not declare a dividend, the company has dividends in arrears. Although not a liability, the amount of any dividends in arrears must be disclosed in the financial statements. Pls note, they're merely DISCLOSED, not recognised in the financial statements. You don't pass any journal entries.

Qn 2
I'm assuming the new shares rank pari passu with the existing shares. If the par value is $10, there were 1,560,900/10 or 156,090 shares outstanding originally. Then another 58,790 were issued, bringing the total outstanding shares to 214,880. A 10% stock dividend is declared. This is considered a small dividend (less than 20-25%). The journal entries are:
Dr Retained earnings (no. of O/S shares x % of stock dividend x mkt value per share) 214,880 x 0.10 x 11 = $236,368
Cr Common stock dividend distributable (no. of O/S shares x % of stock dividend x par value per share) 214,880 x 0.10 x 10 = $214,880
Cr Paid-in capital in excess of par $21,488

The site below explains this beautifully. Pls note that the treatment is different if the stock dividend is a large one.

Answer 2

q1. The dividend is still payable and therefore has already been deducted from equity. (unless the entry was missed, on preferred stock, some how!!!)
q2.market value is arbitrary and should not be recorded. (by the time its recorded, its changed). Market value is realized when a stock is sold.
Market value may be considered before the declaration, and calculations included in the declaration.
I am assuming a 10% common stock dividend, and not a 10% of earnings paid as dividend, or 10% of preferred stock paid as dividend on earnings, or a 10% of retained earnings paid as dividend.

outstanding common shares plus 10%
credit retained earnings.
the entry for prefferred shares must be made first, then the common dividend.