Question

Exercise 15-22

Crane Company’s ledger shows the following balances on December 31, 2020.

6% Preferred Stock—$10 par value, outstanding 21,600 shares		$ 216,000
Common Stock—$100 par value, outstanding 32,300 shares		3,230,000
Retained Earnings		618,000

Assuming that the directors decide to declare total dividends in the amount of $353,000, determine how much each class of stock should receive under each of the conditions stated below. One year‘s dividends are in arrears on the preferred stock.

(a) The preferred stock is cumulative and fully participating. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to 0 decimal places, e.g. $38,487.)

(b) The preferred stock is noncumulative and nonparticipating. (Round answers to 0 decimal places, e.g. $38,487.)

(c) The preferred stock is noncumulative and is participating in distributions in excess of a 8% dividend rate on the common stock. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to 0 decimal places, e.g. $38,487.)

Answer 1

In the case of cumulative preference shares, preference shareholders are liable to previous year dividend also.

a) Cumulative and Participative

Profits available for distribution-: $353,000

Less-: Amount payable to preference shareholders ($216,000 X 6% X 2 years) ($25,920)

Dividend attributable to shareholders $327,080

Dividend attributable to common shareholders = $327,080 X $3,230,000 / ($216,000 + $3,230,000)

=$ 306,503.1921

b) Non-Cumulative and Non-Participative

Profits available for distribution-: $353,000

Less-: Amount payable to preference shareholders ($216,000 X 6% X 1 years) ($12,960)

Dividend attributable to shareholders $340,040

c) Non-Cumulative and Participative

Profits available for distribution-: $353,000

Less-: Amount payable to preference shareholders ($216,000 X 6% X 1 years) ($12,960)

Dividend attributable to shareholders $340,040

Less-: Dividend @8% to common shareholders -: $3230000 X 8% = ($258,400)

Balance Amount -: $81,640

Common shareholders share -: $81,840 X $3,230,000 / ($216,000 + $3,230,000)

=$76,710.1567

Total amount payable to common shareholders -: ($258,400 + $76,710.1567)

=$335,110