The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 10,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $2-per-share dividend is declared?

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BlackTom AI · Accepted Answer

First, restate the problem to frame the scenario: a corporation charter permits 100,000 shares of common stock; 60,000 shares were issued; 10,000 shares have been reacquired as treasury stock. A dividend of $2 per share is declared. We need to determine the total cash dividends to be paid.
Option 1: $120,000. This would correspond to paying $2 per share on 60,000 shares. However, the treasury shares (reacquired 10,000) are not outstanding and do not receive dividends, so paying on all issued shares would be incorrect.
Option 2: $20,000. This would reflect $2 per share on 10,000 shares, which would imply distributing dividends to treasury shares. Treasury shares do not have dividend rights, so this undercounts the amount that should be distributed to outstanding shares.
Option 3: $100,000. This results from paying $2 per share on the number of shares that are actually outstanding. Outstanding shares = issued shares minus treasury shares = 60,000 − 10,000 = 50,000. 50,000 × $2 = $100,000. This aligns with the standard treatment that only issued and outstanding shares receive dividends.
Option 4: $60,000. This would be $2 per share on 30,000 shares, which does not match the given data (neither the total issued nor the outstanding count supports 30,000 as the base). It appears to be a miscalculation that ignores either the total issued or the treasury status.
A key concept here is distinguishing issued shares from outstanding shares and recognizing that treasury stock does not participate in declared dividends. The dividends are allocated to the outstanding shares, which are the issued shares less the treasury shares. Therefore, the correct dividend amount should be computed using 50,000 outstanding shares at $2 each, yielding $100,000. This confirms why options proposing dividends on the full issued amount or on the treasury shares are incorrect.
In summary, the critical steps are to: (1) identify issued shares (60,000), (2) subtract treasury stock (10,000) to get outstanding shares (50,000), (3) multiply by the per-share dividend ($2) to obtain total cash dividends ($100,000), and (4) recognize why the other options either overstate or understate by misallocating to treasury shares or miscounting outstanding shares.

The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 10,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $2-per-share dividend is declared?

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