In: Accounting
This is the shareholders’ equity of the Sun, a joint stock
unlisted company, on Dec 31, 2019.
Common share (1,000,000 issued and outstanding) $6,000,000
3%, preferred shares (100,000 authorized, 80,000 issued)
2,000,000
Retained earnings 4,000,000
Total $12,000,000
Notes:
1. Preferred shares were issued on Jan 1, 2010.
2. No dividends were declared or paid since Dec 31, 2014 until the
Sun declared and paid $2,500,000 dividends on Dec 31, 2019.
Requirements:
a. Assuming preferred shares are cumulative and participating in
dividend distributions up to a 20 percent dividend rate on common
shares, what was the total dividend that preferred and common
shareholders received, respectively on Dec 31, 2019?
b. Assuming preferred shares are cumulative and participating in
dividend distributions in excess of a 40 percent dividend rate on
common shares, what was the total dividend that preferred and
common shareholders received, respectively on Dec 31, 2019?
Thank you for your patience. Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks! |
Sun, a joint stock unlisted company |
Answer a |
Note: Preferred stock is CUMULATIVE so if dividend is not declared then it will be claimed next time when the dividend is declared. Amount will carry forward. |
Dividend distributions up to a 20 percent means if the common stock holders receive more dividend then Preferred stock holders then up to 20% of Common stock dividend will be distributed to Preferred stock holders too. |
Calculation of preferred stock dividend: | |
Preferred stock value | 2,000,000.00 |
Dividend rate | 3% |
Annual Dividend amount | 60,000.00 |
Dividend from 2014 to 2019 (Years) | 6.00 |
Cumulative Preference dividend | 360,000.00 |
Total declared | 2,500,000.00 |
Dividend available after normal preferred stock dividend | 2,140,000.00 |
Common stock value | 6,000,000.00 |
20% Dividend rate | 1,200,000.00 |
So equivalent amount should be paid to Preferred stock holders too. |
So additional payment to Preferred stock holders | 1,200,000.00 |
Total payable | 2,400,000.00 |
Balance for common stock holders | 2,140,000.00 |
Deficit | 260,000.00 |
As there is deficit so remaining dividend will be paid to them equally i.e. $ 2,140,000/2= $ 1,070,000. |
So total received by Preferred stock | 1,430,000.00 |
(360,000+ 1,070,000) | |
And total received by Common stock | 1,070,000.00 |
Total amount | 2,500,000.00 |
Answer b |
Dividend distributions in excess of 40 percent means common stock holders will receive only 40% dividend and any excess balance will be paid to Preferred stock holders. |
Common stock value | 6,000,000.00 |
40% Dividend rate | 2,400,000.00 |
Dividend available after normal preferred stock dividend | 2,140,000.00 |
Deficit | 260,000.00 |
As there is no excess balance but deficit so remaining no participating will be paid Preferred stock holders. |
So total received by Preferred stock | 360,000.00 |
And total received by Common stock | 2,140,000.00 |
Total amount | 2,500,000.00 |