Question

Rosewell Company has had 5,000 shares of 9%, $100 par-value preferred stock and 10,000 shares of $10 par-value common stock outstanding for the last two years. During the most recent year, dividends paid totaled $65,000; in the prior year, dividends paid totaled $40,000.

Required: Compute the amount of dividends that must have been paid to preferred stockholders and common stockholders in each year, given the following independent assumptions:

e. Preferred stock is fully participating and cumulative.

f. Preferred stock is nonparticipating noncumulative.

g. Preferred stock participates up to 10% of its par value and is cumulative.

h. Preferred stock is nonparticipating and cumulative.

Answer 1

Fully participating preference stock holders get 2 amounts :

1) Preferred dividend rate they are entitled to i.e 9%

2) pro rata share along with common stock holders in the remaining dividend.

Partial participating stock holders get :

1) preferred dividend rate they are entitled to i.e 9%

2) The differnece between participating rate of divident and normal preferred dividend rate. I.e 10% - 9% = 1%

Cumulative preference stock holders would be entitled to their non-paid dividend in any previous years due to insufficient surplus/profits to the company.

Dividend distributed to preferred stock and common stock as below :

e) when Preferred stock is fully participating and cumulative :

Year 1 (available Dividend $40000) :

Preferred stock - 100*5000*9% = 45000 but the available surplus is only 40000. It is paid to them and remaining 5000 is cumlated and to be paid to them in subsequent years.

And common stock holders get nothing

Year 2 (Available Dividend $65000) :

Preferred stock - 100*5000*9% = 45000 and the previous year cumulated dividend 5000. So total $50000 will be paid to preferred stock holders.

The remaining $ 15000(65000-50000) will be shared on pro rata basis between participating preference holders and common holders.Total share holders is 10000+5000 = 15000

5000 shares of preferred holders get $5000 i.e 15000*(5000/15000))

10000 shares of common holders gets $10000 ($15000-5000 paid above on pro rata share)

So totally in year 2, preferred holder gets $55000 dividend and common holders get $10000

f) preferred stock is non participating and non cumulative:

Year 1 preferred holders dividend is 45000 calculated above but they gets only 40000 because of insufficient funds. And the balnce 5000 shall be forgotten since non cumulative nature.

Here common holders get none.

Year 2 preferred holders will get 45000 of their normal dividend

And common holders will be getting the remaining 20000 as the preferred holders are non participating, they wont get share in remaining.

g) when preferred holders participating share is 10% and is cumulative:

Year 1 preferred holders divdiend is 45000 but they will get only 40000 and 5000 gets cumulated to be paid to them in subsequent years.

Common stock holders get nothing.

Year 2 preferred stock holders gets 45000 of their normal dividend and 5000 of their cumulated balance. And the remaining dividend is 15000

Here the preferred holders are participationg upto 10% of their par value of which 9% has been paid above. And they will get maximum of 1%.

Now the remaining dividend is shared on pro rata basis between common holders and preferred holders(subject to maximum of 1%)

Pro rata share of preferred holders =$ 15000*(5000/15000) = $5000 subject to their maximum remaining participating share is 1% of 100*5000 which is also $5000. So, preferred holders get 5000 and common holders get 10000 from remaining dividend.

Totally in year 2, preferred holders get $ 55,000 and common holders get $10,000

h) preference stock is non participating and cumulative :

Year1 preferred holders dividend is 45000 but they will get only 40000 due to insufficient funds and that 5000 is cumulated to subsequent years.

Common holders get none.

Year2 preferred holders dividend is 45000 and the cumulated dividend is 5000. Remaining dividend is 15000.

The common stock holders gets that remaining 15000 as the preferred stock holders are non participating, they wont get any pro rata share.

Totally in year 2 - preferred stock holders get $50,000 and common stock holders get $15000.