Gogama Ltd. (Gogama) is planning on declaring a dividend for its common shareholders and is considering three alternatives. The divi dend would be declared on December 31:
i. Declare a cash dividend of $5 per share.
ii. Declare a property dividend. Shareholders would receive two common shares of Judson Inc. (Judson) for each share of Gogama stock owned. Judson's common shares have a market value of $2.50 per share and were originally purchased by Gogama for $1 per share.
iii. Declare a 5 percent stock dividend. Shareholders would receive one Gogama common share for each 20 shares of Gogama stock owned. The current market value of Gogama's stock is $100.
Gogama's year-end is December 31. The balances in the common shares and retained earnings accounts on December 31, 2017 are $7,500,000 and $12,500,000 respectively, after accounting for net income for the year but before accounting for the dividend.
Gogama currently has 500,000 common shares outstanding and net income for 2017 is $1,750,000.

a. Prepare the journal entries required to record each of the dividends. State any assumptions you make.
b. How would the equity section of Gogama's December 31, 2017 balance sheet be affected by the three dividends? Show the effect of each dividend separately.
c. What would basic earnings per share be under each dividend alternative?
d. What difference does it make which dividend alternative Gogama chooses? Is there an economic difference among the three? Explain. Under what circumstances might one dividend alternative be preferred by Gogama over the others?
e. Suppose that instead of paying a property dividend, Gogama sold its shares in Judson and used the proceeds of the sale to pay a cash dividend. Prepare the journal entries required to record the sale of the Judson shares and the declaration and payment of the dividend. What is the difference between paying a property dividend and selling the shares and using the proceeds to pay a dividend?

  • CreatedFebruary 26, 2015
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