Question

The shareholders' equity of Crystal Company includes the items shown below. The board of directors of Crystal declared cash dividends of $6.5 million, $10 million, and $45 million in each of its first 3 years of operation: 2009, 2010, and 2011, respectively.
Common stock, $1 par, 50,000,000 shares outstanding

Preferred stock, 7%, $100 par, 1,000,000 shares outstanding (cumulative)
Preferred stock, 6%, $100 par, 100,000 shares outstanding (non-cumulative)

Determine the amount of dividends distributed on preferred and common stock for each of the three years

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Answer 1

	Year 1	Year 2	Year 3
Preferred stock, 7% Cumulative	6,500,000	7,500,000	7,500,000
Preferred stock, 6% Non - Cumulative	0	600,000	600,000
Common stock	0	1,900,000	36,900,000

Working notes:

i) Annual dividend on Preferred stock = Par value of shares of preferred stock x Dividend rate

Annual dividend on 7% Cumulative preferred stock = 1,000,000 x 100 x 7%

= $7,000,000

Annual dividend on 6%, non - cumulative preferred stock = 100,000 x 100 x 6%

= $600,000

ii) Dividend is first paid to cumulative preferred stockholders, then to non - cumulative preferred stockholders and finally to common stockholders.

iii) In the first year, total dividend paid is $6,500,000. It would be paid to cumulative preferred stockholders. Hence, in the first year, dividend in arrears on cumulative preferred stock is $500,000.

iv) In the second year, total dividend to be paid to cumulative preferred stockholders amounts to $7,500,000 i.e. $7,000,000 for the current year dividend and $500,000 dividend in arrears.