The following selected financial information was extracted from the December 31, 1996, financial records of Cotter Company: Debit Credit Cash 25,000 Short-term investments (2,500 shares of Oreton Corporation) 80,000 Common stock ($10 par value, 100,000 shares authorized, 50,000 issued) 500,000 Additional paid-in capital (C/S) 100,000 Retained earnings (before closing) 245,000 Net income for 1996 43,000 The company’s board of directors is currently contemplating declaring a dividend. The company’s common stock is presently selling for $40 per share. REQUIRED:

a. Given the present financial position of Cotter Company, how large a cash dividend can the board of directors declare? Chapter 12 Stockholders’ Equity 631 (Stock splits and stock dividends) P12-8 (Miscellaneous stockholders’ equity transactions)

b. How large a stock dividend can the board legally declare?

c. Assume that the dividends are declared and issued on the same day. Prepare the journal entry to record the maximum dividend in each case above.

d. If the company sold its short-term investments, how large a cash dividend could it declare and pay? The current selling price of Oreton Corp. is $50 per share.