Question

Pharoah, Inc. has $500,000, $0.50, no par value preferred shares (50,000 shares) and $1,000,000 of no par value common shares outstanding (80,000 shares). No dividends were paid or declared during 2018 and 2019. The company wants to distribute $314,000in dividends on December 31, 2020.

Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common), assuming the preferred shares are non-cumulative and non-participating.

Preferred Common

Total Dividends =

Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common), assuming the preferred shares are cumulative and non-participating.

Preferred Common

Total Dividends =

Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common), assuming the preferred shares are cumulative and fully participating.

Preferred Common

Total Dividends =

Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common), assuming the preferred shares are cumulative and non-participating.

Preferred Common

Total Dividends =

Answer 1

Amount of preferred dividend =Number of shares outstanding * preferred dividend per share

              = 50000 * .50

              = 25000

Total dividend in arrear (2018 & 2019 )= 25000* 2 years = 50000

Situation 1 : preferred shares are non-cumulative and non-participating

	Preferred stock	Common stock	Total dividend
Current year
Preferred dividend	25000	0	25000
common stock dividend	0	289000 (314000-25000)	289000
Total	25000	289000	314000

Situation 2 : preferred shares are cumulative and non-participating :In case of cumulative preferred stock ,Any dividend in arrear is paid in preference to current year common stock and preferred stock dividend.

	Preferred stock	Common stock	Total dividend
Preferred dividend in arrear	50000		50000
Current year
Preferred dividend	25000	0	25000
common stock dividend	0	239000   (314000-75000)	239000
Total	75000	239000	314000

Situation 3 : preferred shares are cumulative and fully participating :In case of participating preferred stock ,After paying dividend to both stock holders using the dividend rate per share as on preference stock ,remaining dividiend is divided among both stockholders in their par value ratios.

	Preferred stock	Common stock	Total dividend
Preferred dividend in arrear	50000		50000
Current year
Preferred dividend	25000	0	25000
common stock dividend	0	80000*.50=40000	40000
Total before participating dividend	75000	40000	115000
Allocation of participating dividend	66333	132667	199000
Total dividend paid	141333	172667	314000

Working Note :Allocation of participating dividend = 314000-115000=199000

	Preferred stock	Common stock	Total
Par value	500000	1000000	1500000
Weights	500000/1500000=.33333	1000000/1500000=.66667
Allocation of participating dividend	199000*.33333=66333	199000*.66667=132667