Question

In: Accounting

This is the shareholders’ equity of the Sun, a joint stock unlisted company, on Dec 31,...

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?

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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

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