Question

At the beginning of Year One, a company issues 40,000 shares of $2 par value common stock for $23 per share in cash. The company also issues 10,000 shares of $40 par value preferred stock that pays an annual dividend of 10 percent. No dividend is paid in Year One but a total dividend of $100,000 is distributed in Year Two.

a. If the preferred stock dividend is not cumulative, what is reported on the financial statements

about the dividend at the end of Year One?

b. If the preferred stock dividend is not cumulative, what amount of cash dividend does each share

of common stock receive in Year Two?

c. If the preferred stock dividend is cumulative, what is reported on the financial statements about

the dividend at the end of Year One?

d. If the preferred stock dividend is cumulative, what amount of cash dividend does each share of

common stock receive in Year Two?

Answer 1

a. If the preferred stock dividend is not cumulative, what is reported on the financial statements about the dividend at the end of Year One?

A : No dividend will be reported as no dividend is declared and non cumulative preferred shares are not carried forward to the subsequent tears.

b. If the preferred stock dividend is not cumulative, what amount of cash dividend does each share of common stock receive in Year Two?

A : Dividend for Preference Shares - 10000 x 40 x 10% = $ 40000; Dividend for Equity shares = $ 100000 - $ 40000 = $ 60000

c. If the preferred stock dividend is cumulative, what is reported on the financial statements about the dividend at the end of Year One?

A: Cumulative dividend will be carried forward in Year 2 and will be paid before paying dividend to equity shareholders .Dividend = $ 40000

d. If the preferred stock dividend is cumulative, what amount of cash dividend does each share of common stock receive in Year Two?

A :Dividend for Preference Shares - $ 40000 + $ 40000 = $ 80000 ; Dividend for Equity shares = $ 100000 - $ 80000 = $ 20000