Question

Exercise 15-21 The outstanding capital stock of Waterway Corporation consists of 2,000 shares of $100 par value, 8% preferred, and 5,100 shares of $50 par value common. Assuming that the company has retained earnings of $86,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions. (a) The preferred stock is noncumulative and nonparticipating. (Round answers to 0 decimal places, e.g. $38,487.) Preferred Common $ $ (b) The preferred stock is cumulative and nonparticipating. (Round answers to 0 decimal places, e.g. $38,487.) Preferred Common $ $ (c) The preferred stock is cumulative and participating. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to 0 decimal places, e.g. $38,487.) Preferred Common $ $

Answer 1

	Given that -
	Preferred stock=2000*100		200000
	Common stock =5100*50		255000
	Total		455000
Answer a)
	The preferred stock is noncumulative and nonparticipating.
				Preferred	Common	Total
	Current year preferred divided 200000*8%			16000		16000
	remaining to common (86000-16000)				70000	70000
	Total			16000	70000	86000
Answer b)	The preferred stock is cumulative and nonparticipating
				Preferred	Common	Total
	Past year's preferred divided 200000*8%*2			32000		32000
	Current year preferred divided 200000*8%			16000		16000
	remaining to common (86000-16000-32000)				38000	38000
	Total			16000	38000	86000
Answer c)
	The preferred stock is cumulative and participating.
				Preferred	Common	Total
	Past year's preferred divided 200000*8%*2			32000		32000
	Current year preferred divided 200000*8%			16000		16000
	Current year common dividend @ 8% = 255000*8%				20400	20400
	remainder to as per participation ratio (86000-68400)			7,737	9,863	17,600
	Total			55,737	30,263	86,000
	Note :
	Participation ratio =			Ratio
	Preferred stock=2000*100		200000	2/4.55	43.9600%
	Common stock =5100*50		255000	2.55/4.55	56.0400%
	Total		455000
	remainder =	17600
	Preferred = 17600*43.96%	7736.96
	Common = 17600*56.04%	9863.04