Pro Com Ltd. issues 8,000, $5 cumulative preferred shares at $66 each and 15,000 common shares at $30 each at the beginning of 2019. Each preferred share is convertible into two common shares. The appropriate preferred share dividend was declared and paid in 2019. During the years 2020 and 2021, the following transactions aff ected Pro Com’s shareholders’ equity accounts:

2020
Jan. 10 Declared and paid $12,000 of annual dividends to preferred shareholders.

2021
Jan. 10 Declared and paid annual dividend to preferred shareholders and a $4,000 dividend to common shareholders.

Mar. 1 The preferred shares were converted into common shares.

Instructions

a. Journalize each of the 2020 and 2021 transactions.

b. Are there any additional reporting requirements regarding preferred share dividends in either 2020 or 2021?

c. What factors aff ect the preferred shareholders’ decision to convert their shares into common shares?

Taking It Further

Why might investors be willing to pay more for preferred shares that have a conversion option?