Question

Use the following information for questions 92–94.

Instanbul Corp. has outstanding 20,000 no par value, $0.80, preferred shares and 100,000 no par value common shares. Dividends have been paid every year except last year and the current year. The carrying value of the preferred shares is $200,000 and of the common shares is $300,000.

92.If the preferred shares are cumulative and non-participating and $100,000 is distributed as a dividend, the common shareholders will receive

a) $0.

b) $68,000.

c) $84,000.

d) $100,000.

93.If the preferred shares are noncumulative and fully participating and $70,000 is distributed as a dividend, the common shareholders will receive

a) $0.

b) $42,000.

c) $46,000.

d) $54,000.

94.If the preferred shares are cumulative and fully participating and $101,000 is distributed as a dividend, the common shareholders will receive

a) $0.

b) $51,000.

c) $61,000.

d) $69,000.

Answer 1

92. b) $68,000

Solution:

Total amount of dividend for -

Preferred stockholders = $16000 + $16000 = $32000

Common stockholders = $68000

Order of payment		Total amount of dividend	calculations
1st	preferred stock – arrears	$16000	20000*$0.8
2nd	Preferred stock – current year	$16000	20000*$0.8
3rd	common stock	$68000	$100000-$16000-$16000

When preferred stock is cumulative then the previous year dividends are paid first and then the current year dividend is paid after that. If preferred stock is non participating then preferred stockholders don’t get dividends out of surplus. Therefore, if the preferred stock is cumulative and non participating then the dividends in arrears are paid first and the current year dividends are paid immediately after the arrears dividends are paid. After these two are paid the left over amount is paid to common stockholders.

93. d) $54,000

Solution:

Total amount of dividend for -

Preferred stockholders = $16000

Common stockholders = $54000

Order of payment		Total amount of dividend	Calculations
1st	preferred stock – arrears	$0
2nd	Preferred stock – current year	$16000	20000*$08
3rd	common stock	$54000	100000*$0.8 = $80000 needs to be paid But the amount distributed is only $70000, the remaining amount i.e. $70000-$16000 =$54000 is paid

When preferred stock is non cumulative then the previous year dividends are not paid. If preferred stock is participating then preferred stockholders get dividends out of surplus. Therefore, if the preferred stock is non cumulative and participating then the dividends in arrears are not paid and the current year dividends are paid first and the common shareholders are paid at the same rate as preferred shareholders. After these two are paid the left over amount is paid to preferred and common stockholders in the amount outstanding ratio.

94. d) $69000

Solution:

Total amount of dividend for

Preferred stockholders = $16000 + $16000 = $32000

Common stockholders = $69000

Order of payment		Total dividend	Calculations
1st	preferred stock : arrears of 2013	$16000	20000*$0.8
2nd	Preferred stock : current year	$16000	20000*$0.8
3rd	common stock	$69000	$101000 – 16000 -16000

When preferred stock is cumulative then the previous year dividends are paid first and then the current year dividend is paid after that.Therefore, if the preferred stock is cumulative and participating then the dividends in arrears are paid first and the current year dividends are immediately and the common shareholders are paid at the same rate as preferred shareholders. After these two are paid the left over amount is paid to preferred and common stockholders in the amount outstanding ratio.