Question

Second Time Around Clothing reported net income during five successive years as follows: 2015, $75,000; 2016, $78,000; 2017, $10,000; 2018, $9,000; 2019, $57,500. The share capital consisted of 22,000, no-par common shares, and 28,500, $0.70 no-par preferred shares. Prepare a schedule showing the amount each share class would receive in dividends if the entire net income amount was distributed each year. Please make sure your final answer(s) are accurate to 2 decimal places.

	Case A		Preferred shares are cumulative and non-participating.
	Case B		Preferred shares are cumulative and fully participating; the matching dividend for common shares is $1.80 per share.
	Case C		Preferred shares are non-cumulative and fully participating; the matching dividend for common shares is $1.80 per share.

	TOTAL DISTRIBUTED	PREFERRED COMMON A	PREFERRED COMMON B	PREFERRED COMMON C
2015
2016
2017
2018
2019
total

Answer 1

Case-A. Preferred shares are cumulative and non-participating.

Cumulative preferred stock means the dividend to the preferred stock if not fully paid off in a partiular year , then it will be carried forward to next year.

Year	Profit($)	Preferred share	Common shares
2015	75000	=28500 *$0.70 =$19950	=$75000-$19950 =$55050
2016	78000	=28500 *$0.70 =$19950	=$78000-$19950 =$58050
2017	10000	Maximum Income available is $10000. Preferred dividend = $ 19950 hence $10000 to be paid in 2017 and balance $ 9950 will be carried forward to next year	$ 0
2018	9000	$9000 to be paid (Balance of $10950 to be carried forward to next year)	$0
2019	57500	=$19950 for 2019 + $9950 for 2017+ $10950 for 2018 =$40850	=$57500-$40850 =$16650

----------------------------------

Case-B (Preferred shares are cumulative and fully participating; the matching dividend for common shares is $1.80 per share.)

It means preferred stock will receive general dividend and common stock will receive matching dividend.The excess dividend will be then divided on prorata basis

Year	Profit($)	Preferred share	Common shares
2015	75000	General dividend=28500 *$0.70 =$19950 Add- Participating dividend = $8719 Total = $28669	Matching dividend for Common shares =$1.80*22000 =$39600 Add- Balance dividend to common stock = $ 6731 Total = $46331	Total General dividend + Matching dividend =19950+39600 =59550 Balance dividend = 75000-19950-39600 = 15450 Participating  dividend to Preferred stock = ($15450/ 50500 shares) * 28500 = $8719 Balance dividend to common stock = $15450-$8719 =$6731
2016	78000	General dividend=28500 *$0.70 =$19950 Add- Participating dividend = $10412 Total = $30362	Matching dividend for Common shares =$1.80*22000 =$39600 Add- Balance dividend to common stock = $ 8038 Total = $47638	Total General dividend + Matching dividend =19950+39600 =59550 Balance dividend = 78000-19950-39600 = 18450 Participating  dividend to Preferred stock = ($18450/ 50500 shares) * 28500 = $10412 Balance dividend to common stock = $18450-$10412 =$8038
2017	10000	Maximum Income available is $10000. Preferred dividend = $ 19950 hence $10000 to be paid in 2017 and balance $ 9950 will be carried forward to next year	$ 0	No dividend to common stock
2018	9000	$9000 to be paid (Balance of $10950 to be carried forward to next year)	$0	No dividend to common stock
2019	57500	General and Cumulative dividend=$19950 for 2019 + $9950 for 2017+ $10950 for 2018 = $40850	Matching dividend for Common shares =$1.80*22000 =$39600 subject to maximum = $57500-$40850 = $16650

-------------------------

Case-C (Preferred shares are non-cumulative and fully participating; the matching dividend for common shares is $1.80 per share.)

Year	Profit($)	Preferred share	Common shares
2015	75000	General dividend=28500 *$0.70 =$19950 Add- Participating dividend = $8719 Total = $28669	Matching dividend for Common shares =$1.80*22000 =$39600 Add- Balance dividend to common stock = $ 6731 Total = $46331	Total General dividend + Matching dividend =19950+39600 =59550 Balance dividend = 75000-19950-39600 = 15450 Participating  dividend to Preferred stock = ($15450/ 50500 shares) * 28500 = $8719 Balance dividend to common stock = $15450-$8719 =$6731
2016	78000	General dividend=28500 *$0.70 =$19950 Add- Participating dividend = $10412 Total = $30362	Matching dividend for Common shares =$1.80*22000 =$39600 Add- Balance dividend to common stock = $ 8038 Total = $47638	Total General dividend + Matching dividend =19950+39600 =59550 Balance dividend = 78000-19950-39600 = 18450 Participating  dividend to Preferred stock = ($18450/ 50500 shares) * 28500 = $10412 Balance dividend to common stock = $18450-$10412 =$8038
2017	10000	Maximum Income available is $10000. Preferred dividend = $ 19950 hence maximum $10000 to be paid in 2017 (No amount to be carried forward as it is non -cumulative)	$ 0	No dividend to common stock
2018	9000	$9000 to be paid	$0	No dividend to common stock
2019	57500	General dividend=$19950	Matching dividend for Common shares =$1.80*22000 =$39600 subject to maximum = $57500-$19950 = $37550