Question

When Crossett Corporation was organized in January Year 1, it immediately issued 5,700 shares of $54 par, 5 percent, cumulative preferred stock and 11,500 shares of $6 par common stock. Its earnings history is as follows: Year 1, net loss of $12,600; Year 2, net income of $61,900; Year 3, net income of $116,400. The corporation did not pay a dividend in Year 1.

Required
a. How much is the dividend arrearage as of January 1, Year 2?
  

b. Assume that the board of directors declares a $47,780 cash dividend at the end of Year 2 (remember that the Year 1 and Year 2 preferred dividends are due). How will the dividend be divided between the preferred and common stockholders? (Amounts to be deducted should be indicated with minus sign.)
  

Answer 1

Solution:

Requirement A:

Dividend arrears as of January 1, Year 2 = Arrears of Preferred dividend for 1st year = 5700 Shares *$54 *5% = $ 15,390

Requirement B:

Year 2	Preferred	Common	Total
Total Dividend	$              30,780	$              17,000	$              47,780

Working:

Year 2	Preferred	Common	Total	Calculation
Preferred Dividend Arrears	$              15,390	$                       -	$              15,390	5700 Shares *$54 *5%
Preferred Dividend Current Year	$              15,390	$                       -	$              15,390	5700 Shares *$54 *5%
Common Dividend Current Year	$                       -	$              17,000	$              17,000	47780-30780
Total Dividend	$              30,780	$              17,000	$              47,780

Notes:

1) Following is the order of dividend distribution in case of preferred dividend arrears:

a) Previous years preferred stock dividend arrears.

b) Current year preferred stock dividend.

c) Current year common stock dividend.