Flaming Lip Corporation Has 25,000 Shares Outstanding Of 12.

flaming Lip Corporation Has 25000 Shares Outstanding Of 12 15 Par

1. Flaming Lip Corporation has 25,000 shares outstanding of 12% $15 par value, cumulative preferred stock. In 2009 and 2010, no dividends were declared on preferred stock. In 2011, Flaming Lip had a profitable year and decided to pay dividends to stockholders of both preferred and common stock. If Flaming Lip has $200,000 available for dividends in 2011, how much could it pay to the preferred and common stockholders?

2. Hot Company issued $500,000 of 5-year, 9% bonds at 96 on January 1, 2012. The bonds pay interest twice a year. (a) Prepare the journal entry to record the issuance of the bonds. (b) Prepare the journal entry to record the first interest payment (c) Repeat the requirements from part (a), assuming the bonds were issued at 105.

3. Freckle Company issued $500,000 of bonds for $521,000. Interest is paid semiannually. a. Prepare the necessary journal entry to record the issuance of the bonds. b. Is the market rate greater or less than the stated rate? How do you know?

Paper For Above instruction

Introduction

The management of corporate finance involves understanding the intricacies of preferred stock dividends and bond issuances. This paper explores three core financial accounting scenarios: dividend allocation for preferred and common stock, bond issuance at varying premiums or discounts, and the implications of bonds issued above face value. These topics are essential for financial analysis, investment decision-making, and understanding corporate capital structure.

Dividend Distribution to Preferred and Common Stockholders

Flaming Lip Corporation holds 25,000 shares of 12% $15 par value, cumulative preferred stock. Since the preferred stock is cumulative, unpaid dividends from previous years accumulate and must be paid out before any dividends can be distributed to common shareholders. The cumulative preferred stock dividends per year are calculated as follows:

Since no dividends were declared in 2009 and 2010, these amounts accumulate, creating a dividend arrearage of $90,000 ($45,000 per year for two years).

In 2011, Flaming Lip has $200,000 available for dividends. First, these are allocated to preferred stockholders to settle the arrearages:

Since the preferred stockholders are entitled to $45,000 annually, they should receive their current year's dividends plus the arrearages before any distribution to common stockholders. The preferred dividend for 2011 is $45,000, which is fully paid, settling the preferred arrearages of $90,000, with $45,000 remaining for distribution to common shareholders.

Therefore, the dividend allocation in 2011 is:

• Preferred stock: $45,000 (current year), fully paid, with arrearages cleared.
• Common stock: Remaining amount = $110,000.

This distribution indicates that preferred shareholders receive their full dividend for 2011, and common shareholders receive $110,000.

Bond Issuance at Discount and Premium

Hot Company issued bonds valued at $500,000 for five years with a stated interest rate of 9%, but at different price points: 96 (discount basis) and 105 (premium basis).

Part (a): Bonds issued at 96

The bonds issued at 96 mean the market value is less than the face value, indicating a discount. The journal entry on January 1, 2012, is:

The journal entry:

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DateAccountDebitCredit Jan 1, 2012Cash$480,000 Discount on Bonds Payable$20,000 Bonds Payable$500,000

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Part (b): First interest payment

Interest payment is semiannual:

Interest = $500,000 * 9% / 2 = $22,500

Adjusting for the bond discount, the interest expense recognized using the effective interest method is:

Interest expense = Carrying amount * effective rate (market rate)

Assuming the effective rate is close to the market rate at issuance, interest expense = $480,000 * (approximate market rate). For simplicity, the cash payment is recorded as:

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DateInterest Expense≈$22,500 Cash$22,500

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In actual practice, the interest expense would be slightly higher because of the amortization of the bond discount.

Part (c): Bonds issued at 105

The bonds issued at 105 mean they are sold at a premium:

Cash received = $500,000 * 1.05 = $525,000

The journal entry:

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DateCash$525,000 Premium on Bonds Payable$25,000 Bonds Payable$500,000

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Interest expense will be lower than the cash interest due to amortization of the premium over the bond period.

Bond Issuance at Premium—Market Rate vs. Stated Rate

Freckle Company issued bonds for $521,000, above the face value of $500,000, indicating the bonds were issued at a premium. Since the bonds sold for more than face value, the market rate of interest must be less than the stated (coupon) rate of 9%. This is because investors are willing to pay a premium for bonds with higher-than-market interest payouts, reflecting a lower prevailing market rate for similar risks.

Conclusion

Financial analysis of preferred stock dividends and bond issuances reveals the nuanced impact of market conditions and corporate policies on capital structure. The preferred stock dividend calculations emphasize the importance of cumulative dividends and prior arrearages, while bond issuance scenarios demonstrate how market conditions influence issuance price, discount or premium calculations, and subsequent interest expense recognition. These insights are critical for effective financial planning and reporting.

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