Question

The Barney company has outstanding stock as follows:

10% preferred stock 10,000 shares $10 par cumulative and participating

Common stock 60,000 shares $5 par

The preferred stock is permitted to participate after common receives $1 per share. The participation is on a total par relationship. There are no arrears going into the first year.

Prepare a dividend allocation schedule including a participation schedule showing total dollars and per share calculations assuming the following dividends are declared.

Year 1 $0

Year 2 $80,000

Year 3 $98,000

PLEASE SHOW ALL WORK!

Answer 1

Year	Year 1	Year 2	Year 3
Allocated to preferred stock	$                     0	$         20,000	$        17,000
Allocated to common stock	$                     0	$         60,000	$        81,000

Calculation

The previous period's unpaid dividend will be paid if the preference share is cumulative.
Annual preferred dividend (10000*10*10%)			$        10,000
Arrears preferred dividends of $10,000 paid in the second year
No dividends paid to preferred stockholders and common stockholders during the first year

Preferred stock (10000*10)	$        100,000
Common stock (60000*5)	$        300,000
Total Par value	$        400,000

Year 2	Preferred	Common	Total
Total dividends declared			$        80,000
Less: Preferred dividend for two years (10000+10000)	$          20,000		$        20,000
Remaining dividends			$        60,000
Less: common dividend (60000*1)		$         60,000	$        60,000
Remaining dividends allocated based on par value			$                 -
Dividend paid to	$          20,000	$         60,000	$        80,000

Year 3	Preferred	Common	Total
Total dividends declared			$        98,000
Less: Preferred dividend for the year	$          10,000		$        10,000
Remaining dividends			$        88,000
Less: common dividend (60000*1)		$         60,000	$        60,000
Remaining dividends allocated based on par value			$        28,000
Dividend allocated to preferred (28000*(100000/400000))	$            7,000		$          7,000
Dividend allocated to common (28000*(300000/400000))		$         21,000	$        21,000
Dividend paid to	$          17,000	$         81,000	$        98,000