The Di Vidnd Corporation was incorporated on January 2, 2020, with two classes of share capital:

• An unlimited number of common shares
• $7 cumulative, non-voting, redeemable preferred shares with an authorized limit of 75,000

During 2020, the following transactions occurred:

1. The company issued 10,000 preferred shares at $25 per share and 10,000 common shares for cash proceeds of $55,000.

2. It issued 60,000 common shares in exchange for equipment with an estimated fair market value of $300,000.

3. In October, the company’s board of directors declared cash dividends in the amount of $3.50 per share on the preferred shares. No dividends were declared on common shares. The dividend was payable in December.

4. In December the cash dividends declared in October were paid.

5. The company had sales revenue of $2,075,000 and incurred operating expenses of $1,825,000 during the year. During 2021, the following transactions occurred:

6. In October, the company’s board of directors declared total cash dividends in the amount of $200,000. The dividends were payable on December 14.

7. In December, the cash dividends from October were paid.

8. At the end of December, the board of directors declared and distributed a 20% stock dividend on the common shares. The estimated market value of the common shares at the time was $7 per share.

9. The company had sales revenue of $2,100,000 and incurred $1,005,000 in operating expenses during the second year.

Required

a. Prepare journal entries to record the above transactions, including closing entries for net income and dividends declared in transactions 3, 6, 7, and 8.

b. Use a spreadsheet or table format like the one in Chapter End Review Problem 11-4 to track the changes in all of the shareholders’ equity accounts over the two-year period.

c. How large a dividend could the board of directors legally declare at the end of the second year?

d. Prepare the shareholders’ equity section of the statement of financial position at the end of the second year.