Question

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.)

preferred = ? common =?

(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.)

preferred = ? common =?

Answer 1

a) The preferred stock is cumulative and fully participating is as follows:

Annual dividend on prefrence shares = $186,000 * 8% = $14,880

The preferred stock is cumulative , so dividend payable on prefrence shares =

$14,880 (Arrears for one year ) + $14,880 (Current Year)

= $29,760

Balance Dividend = $371,000 - $29,760

                          = $341,240

Prefrence shares is participating

so, Total Capital = Preferred Stock + Common Stock

                        = $186,000 + $2,750,000

                        = $2,936,000

So Prefrence dividend to Prefrence stockholders = $341,240 / $2,936,000 * $186,000

                                                                       = $21,618

Total Dividend payable to Prefrence stockholders = $29,760 + $21,618

                                                                                = $51,378

Total Dividend payable to Common stockholders = $371,000 - $51,378

                                                                               = $319,622

b) The preferred stock is noncumulative and is participating in distributions in excess of a 11% dividend rate on the common stock.

Annual dividend on prefrence shares = $186,000 * 8% = $14,880

The preferred stock is noncumulative , so dividend payable on prefrence shares = $14,880 (Current Year)

Balance Dividend = $371,000 - $14,880

                          = $356,120

Dividend on common stock = $ 2,750,000 * 11%

                                            = $302,500

Balance Dividend = $356,120 - $302,500

                        = $53,620

so, Total Capital = Preferred Stock + Common Stock

                        = $186,000 + $2,750,000

                        = $2,936,000

So Prefrence dividend to Prefrence stockholders = $186,000 / $2,936,000 * $53,620

                                                                       = $3,397

Total Dividend payable to Prefrence stockholders = $14,880 + $3,397

                                                                                = $18,277

Total Dividend payable to Common stockholders = $371,000 -$18,277

                                                                               = $352,723