The books of Binkerton Corporation carried the following account balances as at December 31, 2014:
Cash ....................................................................................................... $ 1,300,000
Preferred shares, $2 cumulative dividend, non-participating, 25,000 shares issued ................ 750,000
Common shares, no par value, 300,000 shares issued .............................................. 15,000,000
Contributed surplus (preferred) ........................................................................... 150,000
Retained earnings ........................................................................................... 327,000
The preferred shares have dividends in arrears for the past year (2013). At its annual meeting on December 21, 2014, the board of directors declared the following: The current year dividends shall be $2 per share on the preferred and $0.70 per share on the common; the dividends in arrears shall be paid by issuing one share of common shares for each 10 shares of preferred held.
The preferred shares are currently selling at $80 per share and the common shares at $20 per share. Net income for 2014 is estimated at $56,000.
Instructions
(a) Prepare the journal entries that are required for the dividend declaration and payment, assuming that they occur at the same time.
(b) Could the company give the preferred shareholders two years of dividends and common shareholders a $0.70 per share dividend, all in cash? Explain your reasoning.