Question

The shareholders’ equity of ILP Industries includes the items shown below. The board of directors of ILP declared cash dividends of $8 million, $20 million, and $150 million in its first three years of operation—2021, 2022, and 2023, respectively. 

                                                                              ($ in millions) 

Common stock.................................................................................$100 

Paid-in capital—excess of par, common..................................980 

Preferred stock, 8%..........................................................................200 

Paid-in capital—excess of par, preferred................................555 

 

Required: 

Determine the amount of dividends to be paid to preferred and common shareholders in each of the three years, assuming that the preferred stock is cumulative and nonparticipating. 

Answer 1

	Par Value Preferred Stock	Dividend Rate	Annual Preferred Dividend
Annual preferred dividend	$200	8%	$16
	Total Cash Dividend Paid	Paid to Preferred	Paid to Common	Dividend in Arrears at year-end
2021	$8	$8	$0	$8
2022	$20	$20	$0	$4
2023	$150	$20	$130	$0
Total	$178	$48	$130

 

As the preferred stock are cumulative and nonparticipating that means the company will receive the dividends of previous years if they are not received or partially received.

 

In 2021, the company has declared the cash dividend of $8 million but the dividend for preferred stock is $16 million. So, the company will the dividend of $8 million in 2021 and the remaining dividend of $8 million ($16-8) will be dividend in arrears.

 

In 2022, the company has declared the cash dividend of $20 million and the company has to pay the total dividend to preferred stock is $24 million ($16 million of current year plus $8 million of dividend in arrears). So, the company will pay the dividend of $20 million in 2022 and the remaining $4 million ($24-20) will be dividend in arrears).

 

In 2023, the company has declared the cash dividend of $150 million and the company has to pay the total dividend to preferred stock is $20 million ($16 million of current year plus $4 million of dividend in arrears). So, the company will pay $20 million to preferred stock and the remaining amount of $130 million ($150-20) to common stockholders.

In 2021 prefered stock is $8

In 2022 prefered stock is $20