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.

The preferred share dividend was not paid in 2022.

Several transactions affecting shareholders’ equity took place during the fiscal year ended December 31, 2023, and are summarized in chronological order as follows:

1. Exchanged 10,000 common shares for prototype piano tuning equipment. The equipment 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 $12.50 per share. Round average price per share to the nearest dollar.

3. Paid the annual dividend on the preferred shares. The common shares were then paid a $2 per share dividend. Round the participating percentage to four decimal places.OOI’s net income for 2023 was $65,000.

Instructions

a. Prepare journal entries for each of the three transactions.

b. Calculate the company’s payout ratio for 2023. Round to the next full percentage point. Would the payout ratio for 2023 be different if the preferred share dividend was paid in 2022?

c. Comment on the results of your analysis from the perspective of a potential investor.

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Original Octave Inc. Shareholders' Equity December 31, 2022 Share capital Preferred shares, no par value, $8, cumulative, and participating (20,000 authorized; 1,000 issued and outstanding) Common shares, unlimited number authorized, 40,000 issued and outstanding Contributed capital, preferred share retirement Retained earnings Shareholders' equity $100,000 500,000 20,000 620,000 280,000 $900,000