Question

The records of Hollywood Company reflected the following balances in the stockholders' equity accounts at the end of the current year:

Common stock, $12 par value, 50,000 shares outstanding

Preferred stock, 10 percent, $10 par value, 5,000 shares outstanding

Retained earnings, $227,000

On September 1 of the current year, the board of directors was considering the distribution of an $82,000 cash dividend. No dividends were paid during the previous two years. You have been asked to determine dividend amounts under two independent assumptions (show computations):

a. The preferred stock is noncumulative.

b. The preferred stock is cumulative.

Required:

1. Determine the total and per share amounts that would be paid to the common stockholders and the preferred stockholders under the two independent assumptions. (Round your "per share" amounts to 2 decimal places.)

Answer 1

Preferred stock is a stock that gives its owner certain advantages over common shareholders. Some asvantages are fixed dividend rate, higher claim on company's assets in case of liquidation that common shareholder.

Cumularive Preference Share: In this the annual dividend idf not paid in any year due to insufficeient profit then accrues the next year and all the outstanding divided of cumulative preference is to be paid before making any payment to common sharehlders.

Non-cumulative Preference shares: In this the annual dividend if not paid ina any year due to insufficeient profit then the unpaid dividend is not carried forward subsequent year. Means that any unpaid dividend is not paid subsequently.

	Preferred	Common
Non Cumulative:
Total	[(5000*$10)*10%]	$5000	[$82000-5000]	$77000
Per Share	[$5000/5000]	$1.00	[$77000/50000]	$1.54
Cumulative
Total	[(5000*$10)*10%]*3	$15000	[$82000-15000]	$67000
Per Share	[$15000/5000]	$3.00	[$67000/50000]	$1.34