Original Octave Inc OOI is a widely held publicly traded

#1287

Original Octave Inc. (OOI) is a widely held, publicly traded company that designs equipment for
tuning musical instruments. Information about its shareholders' equity is as follows.

ORIGINAL OCTAVE INC.

Shareholders' Equity

December 31, 2013

Share capital

Preferred shares, no par value, $8, cumulative, and participating

(20,000 authorized; 1,000 issued and outstanding) ..................................... $100,000

Common shares, no par value

(1,000,000 authorized; 40,000 issued and outstanding) ................................. 500,000

Contributed capital, preferred share retirement ............................................ 20,000

620,000

Retained earnings ............................................................................ 280,000

Shareholders' equity ........................................................................ $900,000

The preferred share dividend was not paid in 2013.

Several transactions affecting shareholders' equity took place during the fiscal year ended
December 31, 2014, and are summarized in chronological order as follows.

1. Exchanged 10,000 common shares for a prototype piano tuning machine. The machine was
valued at $100,000 by an independent appraiser. On the transaction date, OOI's shares were
actively trading at $10 per share.

2. Purchased and retired 10,000 common shares at $15 per share.

3. Paid the annual dividend on the preferred shares. The common shares were then paid a $2
per share dividend.

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 Original Octave's net income for 2014 was $65,000.

Instructions

(a) Prepare journal entries for each of the three transactions.

(b) Calculate the company's payout ratio for 2014. Would the payout ratio for 2014 be different if
the preferred share dividend was paid in 2013? Comment on the results of your analysis from
the perspective of a potential investor.

Original Octave Inc OOI is a widely held publicly traded

ANSWER
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