Oregano Inc. was formed on July 1, 2009. It was authorized to issue 300,000 shares of no par value common shares and 100,000 shares of cumulative and non-participating preferred stock carrying a $2 dividend. The company has a July 1 to June 30 fiscal year. The following information relates to the company’s shareholders’ equity account. Common Shares Before the 2011–12 fiscal year, the company had 110,000 shares of outstanding common issued as follows:
1. 95,000 shares issued for cash on July 1, 2009, at $31 per share
2. 5,000 shares exchanged on July 24, 2009, for a plot of land that cost the seller $70,000 in 1999 and had an estimated fair value of $220,000 on July 24, 2009
3. 10,000 shares issued on March 1, 2010; the shares had been subscribed for $42 per share on October 31, 2009 Oct. 1, 2011 Subscriptions were received for 10,000 shares at $46 per share. Cash of $92,000 was received in full payment for 2,000 shares and share certificates were issued.
The remaining subscription for 8,000 shares was to be paid in full by September 30, 2012, and the certificates would then be issued on that date. Nov. 30, 2011
The company purchased 2,000 of its own common shares on the open market at $39 per share. These shares were restored to the status of authorized but unissued shares. Dec. 15, 2011
The company declared a 5% stock dividend for shareholders of record on January 15, 2012, to be issued on January 31, 2012. The company was having a liquidity problem and could not afford a cash dividend at the time. The company’s common shares were selling at $52 per share on December 15, 2011. June 20, 2012
The company sold 500 of its own common shares for $21,000.
Preferred Shares The company issued 50,000 preferred shares at $44 per share on July 1, 2009. Cash Dividends The company has followed a schedule of declaring cash dividends each year in December and June and making the payment to shareholders of record in the following month. The cash dividend declarations have been as follows since the company’s first year and up until June 30, 2012:
No cash dividends were declared during June 2012 due to the company’s liquidity problems. Retained Earnings As at June 30, 2011, the company’s retained earnings account had a balance of $690,000. For the fiscal year ending June 30, 2012, the company reported net income of $40,000. In March 2011, the company received a term loan from Alberta Bank. The bank requires the company to establish a sinking fund and restrict retained earnings for an amount equal to the sinking fund deposit. The annual sinking fund payment of $50,000 is due on April 30 each year; the first payment was made on schedule on April 30, 2012.
(a). Prepare the shareholders’ equity section of the company’s balance sheet, including appropriate notes, as at June 30, 2012, as it should appear in its annual report to the shareholders.
(b). Prepare the journal entries for the 2011–12 fiscal year.
(c). Discuss why the common shareholders might be willing to accept a stock dividend during the year rather than a cash dividend.