Question

The outstanding share capital of Pronghorn Corporation consists of 3,500 shares of preferred and 6,900 common shares for which $248,400 was received. The preferred shares carry a dividend of $5 per share and have a $100 stated value.

Assuming that the company has retained earnings of $77,500 that is to be entirely paid out in dividends and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of shares should receive if the preferred shares are non-cumulative and non-participating.

		Preferred		Common		Total
Dividends		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount

  

  

Assuming that the company has retained earnings of $77,500 that is to be entirely paid out in dividends and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of shares should receive if the preferred shares are cumulative and non-participating.

		Preferred		Common		Total
Dividends		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount

  

  

Assuming that the company has retained earnings of $77,500 that is to be entirely paid out in dividends and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of shares should receive if the preferred shares are cumulative and participating. (Round answers to 0 decimal places, e.g. 5,275.)

		Preferred		Common		Total
Dividends		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places

  

  

Assume that Pronghorn’s current year net income was $95,400. Calculate the current year payout ratio under each of the conditions below. (Round answers to 2 decimal places, e.g. 52.75.)

				Payout Ratio
(a)		The preferred shares are non-cumulative and non-participating.		enter payout ratio rounded to 2 decimal places
(b)		The preferred shares are cumulative and non-participating.		enter payout ratio rounded to 2 decimal places
(c)		The preferred shares are cumulative and participating.		enter payout ratio rounded to 2 decimal places

Answer 1

Answer:

		Preferred		Common		Total
(a)	Preferred share is    non-cumulative,    non-participating	$17,500 ($5*3,500)		$60,000 ($77,500-$17,500)		$77,500
(b)	Preferred share is    cumulative, non-      participating	$52,500 (17,500*3)		$25,000 (77,500-52500)		$77,500
(c)	Preferred share is    cumulative, participating	$59,858		$17,642		$77,500
	Dividends in arrears	$35,000				$35,000
	Current dividend	17,500				17,500
	Pro rata share to       common
	($248,400 X 5%*)			$12,420		12,420
	Balance dividend pro       rata
	($350,000 / $598,400)       X $12,580**	7,358				7,358
	($248,400/¸ $598,400)       X $12,580	_______		5,222		5,222
		$59,858		$17,642		$77,500
	Carrying amount: Preferred: $100 X 3,500 Common: $36 X 6,900 Total carrying amount	$350,000 $248,400 $598,400

* Dividend rate per share of $5 divided by $100 stated value for the preferred shares.

** $77,500 – $35,000 – $17,500 -12,420= $12,580