Question

Q4. Exercise 14-02 Sunland Corporation was organized on January 1, 2019. During its first year, the corporation issued 1,950 shares of $50 par value preferred stock and 110,000 shares of $10 par value common stock. At December 31, the company declared the following cash dividends: 2019, $5,325; 2020, $13,800; and 2021, $28,500.

a. Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 7% and noncumulative.

b. Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and cumulative.

Answer 1

(a): Dividend for preferred shares = 7% of (1,950 shares * $50) = $6,825. As they are non-cumulative the will not accumulate in the form of arrears each year.

		2019	2020	2021
a	Cash dividends	5,325	13,800	28,500
b	Amount paid to preference shareholders	5,325	6,825	6,825
c	Amount paid to common stock holders = a - b	0	6,975	21,675

(b): Here any unpaid dividends for preference shareholders will accrue and will have to be paid in the next year if there are sufficient earnings. Dividend amount for preferred shareholders = 8% of (1,950 shares * $50) = $7,800

		2019	2020	2021
a	Cash dividends	5,325	13,800	28,500
b	Amount paid to preference shareholders	5,325	7,800	7,800
c	Amount of preferred dividend unpaid	2,475
d	Accrued amount of preferred dividend paid		2,475
e = b + d	Total preferred dividends	5,325	10,275	7,800
f = a - e	Amount paid to common stock holders	-	3,525	20,700