Question

Ring A. Ling, Inc., has $800,000 of 4% preferred stock and $1,200,000 of common stock outstanding, each having a par value of $10 per share. No dividends have been paid or declared during 2016 and 2017. The board of directors desires to distribute $270,000 in dividends on December 31, 2018.

Instructions

Prepare a schedule to show how much will the preferred and common stockholders receive under each of the following independent assumptions:

(a)       The preferred is noncumulative and nonparticipating.

(b)       The preferred is cumulative and nonparticipating.

(c)       The preferred is cumulative and fully participating.

(d)       The preferred is cumulative and participating to 7% total.

Answer 1

Answer:

Preparation of a schedule to show how much will the preferred and common stockholders receive under each of the following independent assumptions:

a) The preferred is noncumulative and nonparticipating.

Particulars	Preffered	Common	Total
Current year's dividend (4% of $800,000)	$32,000		$32,000
Remainder to common ( $270,000 – $32,000)		$238,000	$238,000
Total	$32,000	$238,000	$270,000

b) The preferred is cumulative and nonparticipating.

Particulars	Preferred	Common	Total
Dividends in arrears, 4% of $800000 for two years {($800,000 × 4%)× 2 year}	$64,000		$64,000
Current year's dividend (800,000 × 4%)	$32,000		$32,000
Remainder to common ($270,000 – $96,000) (notes 1)		$174,000	$174,000
Total	$96,000	$174,000	$270,000

c) The preferred is cumulative and fully participating.

Particulars	Preferred	Common	Total
Dividends in arrears, 4% of $800000 for two years	$64,000		$64,000
Current year's dividend (notes 2)	$32,000	$48,000	$80,000
Participating dividend 6.3% (Notes 3)	$50,400	$75,600	$126,000
Total	$146,400	$123,600	$270,000

d) The preferred is cumulative and participating to 7% total.

Particulars	Preferred	Common	Total
Dividends in arrears, 4% of $800000 for two years {( $800,000 × 4%) × 2 years}	$64,000		$64,000
Current year's dividend ( notes 2)	$32,000	$48,000	$80,000
Participating dividend 3% (7% – 4%) (Notes 4)	$24,000	$36,000	$60,000
Remainder to common (Notes 5)		$66,000	$66,000
Total	$120,000	$150,000	$270,000

Notes:

1. Remainder to common = $270,000 – (Dividend in arrears 4% of 800,000 for two years + Current years dividend)

= $270,000 – ($64,000 + $ 32,000)

=$270,000 – $96,000

=$174,000

2. Current year's Dividend in Preffered = ($800,000 × 4%) =$32,000

Current year's Dividend in common = ($1,200,000 ×4%) =$48,000

3. Total participating dividend = $270000 – (Total Dividend in arrear + Total current years dividend)

=$270000 – ($64000 + $80000)

=$270000 – $144,000

=$126,000

Participating Dividend % = {( 126,000 ÷ $2,000,000) × 100} = 6.3%

Participating dividend in Preffered = $8,00,000 × 6.3% = $50,400

Participating dividend in Common = $1,200,000 × 6.3% = $75,600

4. Participating dividend in Preffered = $8,00,000 × 3% = $24,000

Participating dividend in Common = $1,200,000 × 3% = $36,000

5. Remainder to common = $270,000 – (Dividend in arrears 4% of 800,000 for two years + Total of Current years dividend + participating dividend 3%)

=. $270000 – ( $64,000 + $80000 +$60000)

=$66,000