Question

Homestead Oil Corp. was incorporated on January 1, 2016, and issued the following stock for cash:

  

870,000 shares of no-par common stock were authorized; 150,000 shares were issued on January 1, 2016, at $18.00 per share.

290,000 shares of $100 par value, 9.00% cumulative, preferred stock were authorized, and 67,000 shares were issued on January 1, 2016, at $150 per share.

Net income for the years ended December 31, 2016 and 2017, was $1,460,000 and $2,490,000, respectively.

No dividends were declared or paid during 2016. However, on December 28, 2017, the board of directors of Homestead declared dividends of $1,510,000, payable on February 12, 2018, to holders of record as of January 19, 2018.

. Of the total amount of dividends declared during 2017, how much will be received by preferred shareholders?

  

Answer 1

Whenever there is preferential stock, in the company, then before paying to equity share holders, payment need to be made to preference shareholders.

In case there is cumulative preference stock in the company, then the dividend of preference stock gets accumulated until paid.

In the given case preference shares are cumulative in nature.

No dividend is paid in the year 2016, Dividend of $1,510,000 is declared in the year 2017, before the year end that means dividend is for the year 2016 or interim dividend of 2017, since not specified, no interim dividend will be considered. Accordingly, it will be treated as dividend for the year 2016.

Therefore, it is the dividend for the year 2016 only.

Preference dividend included in this amount = 9% of 67,000 X 100 (being par value)

= $603,000

Note 1 Dividend is paid on par value of a share.

Note 2 Preference dividend for the year 2017 will shown as liability at year end. This dividend is only for the year 2016.

Note 3 Date of declaration of dividend is before year end, date of payment is of no relevance. Also date of holders of record given is of no relevance. And therefore dividend is declared for the financial year 2016.