Question

Question 2 Ayayai Company’s ledger shows the following balances on December 31, 2020.

8% Preferred Stock—$10 par value, outstanding 18,600 shares $ 186,000

Common Stock—$100 par value, outstanding 27,500 shares 2,750,000

Retained Earnings 662,000

Assuming that the directors decide to declare total dividends in the amount of $371,000, determine how much each class of stock should receive under each of the conditions stated below. One year‘s dividends are in arrears on the preferred stock.

(a) The preferred stock is cumulative and fully participating. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to 0 decimal places, e.g. $38,487.)
(b) The preferred stock is noncumulative and nonparticipating. (Round answers to 0 decimal places, e.g. $38,487.)

(c) The preferred stock is noncumulative and is participating in distributions in excess of a 11% dividend rate on the common stock. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to 0 decimal places, e.g. $38,487.)

Answer 1

Required a: When preferred stock is cumulative and fully participating.

In case of fully participating preferred dividend, After paying same dividend rate as of preferred stockholders to common stockholders, remaining dividend is share between both stockholders in their capital ratio.

Preferred dividend = $186,000 * 8% = $14,880.

	Preferred stock	Common stock	Total
Previous year preferred dividend	$14,880	-	$14,880
Current year preferred dividend	$14,880	-	$14,880
Common stock dividend	-	$220,000 ($2,750,000*8%)	$220,000
Total (1)	$29,760	$220,000	$249,760
Participating dividend (2)	$7,687 (121,240*6.34%)	$113,553 (121,240*93.66%)	$121,240
Total dividend (1 + 2)	$37,447	$333,553	$371,000

Working:

Remaining dividend = $371,000 - $249,760 = $121,240.

	Contributed capital	Participation rate
Preferred stock	$186,000	6.34%(186,000/2,936,000)*100
Common stock	$2,750,000	93.66% (2,750,000/2,936,000)*100
Total	$2,936,000

Required b: When preferred stock is noncumulative and nonparticipating

	Preferred stock	Common stock	Total
Current year preferred dividend	$14,880	-	$14,880
Common stock dividend	-	$356,120 (371,000-14,880)	$356,120
Total Dividend	$14,880	$356,120	$371,000

Required c: When preferred stock is noncumulative and is participating in distributions in excess of a 11% dividend rate on the common stock.

	Preferred stock	Common stock	Total
Current year preferred dividend	$14,880		$14,880
Common stock dividend	-	$302,500 ($2,750,000*11%)	$302,500
Total (1)	$14,880	$302,500	$317,380
Participating dividend (2)	$3,400 (53,620*6.34%)	$50,220 (53,620*93.66%)	$53,620
Total dividend (1 + 2)	$18,280	$352,720	$371,000

Working:

Remaining dividend = $371,000 - $317,380 = $53,620.

	Contributed capital	Participation rate
Preferred stock	$186,000	6.34%(186,000/2,936,000)*100
Common stock	$2,750,000	93.66% (2,750,000/2,936,000)*100
Total	$2,936,000