Original Octave Inc. (OOI) is a widely held, publicly traded company that designs equipment for tuning musical instruments. Information about its shareholders' equity is as follows.
ORIGINAL OCTAVE INC.
Shareholders' Equity
December 31, 2013
Share capital
Preferred shares, no par value, $8, cumulative, and participating
(20,000 authorized; 1,000 issued and outstanding) ..................................... $100,000
Common shares, no par value
(1,000,000 authorized; 40,000 issued and outstanding) ................................. 500,000
Contributed capital, preferred share retirement ............................................ 20,000
620,000
Retained earnings ............................................................................ 280,000
Shareholders' equity ........................................................................ $900,000
The preferred share dividend was not paid in 2013.
Several transactions affecting shareholders' equity took place during the fiscal year ended December 31, 2014, and are summarized in chronological order as follows.
1. Exchanged 10,000 common shares for a prototype piano tuning machine. The machine was valued at $100,000 by an independent appraiser. On the transaction date, OOI's shares were actively trading at $10 per share.
2. Purchased and retired 10,000 common shares at $15 per share.
3. Paid the annual dividend on the preferred shares. The common shares were then paid a $2 per share dividend.
Original Octave's net income for 2014 was $65,000.
Instructions
(a) Prepare journal entries for each of the three transactions.
(b) Calculate the company's payout ratio for 2014. Would the payout ratio for 2014 be different if the preferred share dividend was paid in 2013? Comment on the results of your analysis from the perspective of a potential investor.