Question

Derek Corporation was organized on January 1, 2017. During its first year, the corporation issued

20,000 shares of $5 shares par value preferred stock and 200,000 shares of $1 par value common

​ stock. At December 31, the company declared the following cash dividends:

​​2017​​​​​$ 4,000

​​2018​​​​​$13,000

​​2019​​​​​$28,000

INSTRUCTIONS:

a) ​Show the allocation of dividends to each class of stock, assuming the preferred

stock dividend is 5% and not cumulative.

b)​Show the allocation of dividends to each class of stock, assuming the preferred

stock dividend is 7% and cumulative.

c)​Journalize the declaration of the cash dividend at December 31, 2017 using the

assumption of part (b).

Answer 1

a.
In case of non-cumulative preferred stock dividend, only current year dividend would be paid to preferred shareholders and balance to common shareholders
Dividend for 2017
Preferred stock dividend	20000*5*5%
Preferred stock dividend	$5,000
The dividend declared is $4,000 and thus entire $4,000 would be paid to preferred shareholders
Preferred stock dividend	$4,000
Common stock dividend	$0
Dividend for 2018
Preferred stock dividend	$5,000
Common stock dividend	$8,000	13000-5000
Dividend for 2019
Preferred stock dividend	$5,000
Common stock dividend	$23,000	28000-5000
b.
In case of cumulative preferred stock dividend, current year and previous year dividend not paid would also be payable
Dividend for 2017
Preferred stock dividend	20000*5*7%
Preferred stock dividend (Total payable)	$7,000
Preferred stock dividend	$4,000
Commons stock dividend	$0
Dividend for 2018
Preferred stock dividend	$10,000	7000+(3000 dividend of 2017)
Common stock dividend	$3,000	13000-10000
Dividend for 2019
Preferred stock dividend	$7,000
Common stock dividend	$21,000	28000-7000
c.
Journal entry for 2017 dividend declared
Date	General Journal	Debit	Credit
31-Dec-17	Retained earnings	$4,000
	Dividend payable - Preferred shares		$4,000
	(To record dividend declared)