Question

Nottebart Corporation has outstanding 10,000 shares of $100 par value, 6% preferred stock and 60,000 shares

of $10 par value common stock. The preferred stock was issued in January 2017, and no dividends were declared in 2017 or 2018.

In 2019, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders

if the preferred is (a) noncumulative and (b) cumulative?

Answer 1

Concepts and reason

Stock: An equal part or a portion of company’s capital that indicates ownership of the holder in a company and that states that the shareholder has a claim in the profits and the assets of a company is referred to as a share. A bundle of fully paid shares is referred to as stock. The two main categories of stock are preferred stock and common stock.

Cumulative preferred stock: Cumulative preferred stock indicates when the payment of dividend has not been done to appropriate shareholders, and it should be done by nearby time and should consider the shareholders as first priority during the next payment of dividend or if any inter dividend or profit is earned.

Non-cumulative preferred stock: In the non-cumulative preferred stock will pay only the current year dividends will be paid to the corporation for the purpose of issuing the dividend to the common stockholders.

Fundamentals

Shares: Shares are part of the capital of a company subdivided into individual units. The types of shares are equity shares and preference shares. The person who purchases shares is known as shareholder.

Common stock: Common stock is the stock issued by a company to the people having voting rights. It is termed to be as stockholders equity account. It is a form of corporate equity ownership. It is one of the forms of securities that it is issued to common shareholders. They are entitled to dividend and repayment of capital after payment is made to preference shareholders. It will be reported in the balance sheet as liabilities.

Preferred stock: Preferred stock is the stock issued by a company indicating that the holders of the preferred stock are given priority while issuing dividend. They are completely settled and in case of arrears the dividend or any amount is settled in future year.

Dividends: Dividends are the divisible profits of a company that are issued to the shareholder for the portion of share he has purchased. It should be through the way of purchase in the company. They are an expense for the company.

Outstanding shares: Outstanding shares are the shares that are held by stockholders, which are issued by a company.

a)

Determine the preferred stock if it is non-cumulative:

Therefore, the dividend to preferred stockholders is $60,000 and to common stockholders is $240,000.

Working notes:

Calculation is given below:

b)

Determine the preferred stock if it is cumulative:

Therefore, the dividend to preferred stockholders is $180,000 and to common stockholders is $120,000.

Working notes:

Calculation is given below:

Ans: Part a

If the preferred stock is non-cumulative, then the dividend to the preferred stockholders is $60,000 and to common stockholders is $240,000.

Part b

If the preferred stock is cumulative, then the dividend to the preferred stockholders is $180,000 and to common stockholders is $120,000.