Question

Q7. Selfridges Company has 20,000 shares of 9% cumulative preferred stock of $70 par and 15,000 shares of $55 par common stock. The following amounts were distributed as dividends: Year 1 $13,000 Year 2 6,000 Year 3 200,000 Determine the dividends per share for preferred and common stock for each year.

Answer 1

Since the preferred stock is cumulative, the non-paying dividends for any year must be paid in coming years as on preference.

Preferred stock dividends = shares × par value × dividend rate

                                           = 20,000 × 70 × 9%

                                           = 126,000

Year 1:

Total dividends = 13,000

Since the total dividend is less than the amount of preferred stock dividends, the whole dividend would be for preferred stock and there would be nothing left for common stock.

Dividends per share for preferred stock = Total dividends / Number of preference shares

                                                                  = 13,000 / 20,000

                                                                  = $0.65 (Answer)

Dividends per share for common stock = 0 (Answer)

Dividends due for preferred stock = (126,000 – 13,000) = 113,000

Year 2:

Total dividends = 6,000

Since the total dividend is less than the amount of preferred stock dividends, the whole dividend would be for preferred stock and there would be nothing left for common stock.

Dividends per share for preferred stock = Total dividends / Number of preference shares

                                                                  = 6,000 / 20,000

                                                                  = $0.30 (Answer)

Dividends per share for common stock = 0 (Answer)

Dividends due for preferred stock = (126,000 – 6,000) = 120,000

Year 3:

Total dividends = 200,000

Total Dividends due for preferred stock (including the current year) = 113,000 + 120,000 + 126,000 = 359,000

Since the total dividend is less than the amount of preferred stock dividends due, the whole dividend would be for preferred stock and there would be nothing left for common stock.

Dividends per share for preferred stock = Total dividends / Number of preference shares

                                                                  = 200,000 / 20,000

                                                                  = $10 (Answer)

Dividends per share for common stock = 0 (Answer)