When Crossett Corporation was organized in January, Year 1, it immediately issued 4,100 shares of $51 par, 5 percent, cumulative preferred stock and 11,500 shares of $7 par common stock. Its earnings history is as follows: Year 1, net loss of $15,000; Year 2, net income of $124,000; Year 3, net income of $223,000. 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 $54,500 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? Complete this question by entering your answers in the tabs below. Required A Required B Assume that the board of directors declares a $54,500 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? Distributed to Shareholders Common Amount Preferred Total dividend declared Year 1 Arrearage 10,455 Year 2 Preferred dividends 10,455 10.455 Available for common Distributed to common Total distribution < Required A
When Crossett Corporation was organized in January, Year 1, it immediately issued 4,100 shares of $51 par, 5 percent, cumulative preferred stock and 11,500 shares of $7 par common stock. Its earnings history is as follows: Year 1, net loss of $15,000; Year 2, net income of $124,000; Year 3, net income of $223,000. 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 $54,500 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? Complete this question by entering your answers in the tabs below. Required A Required B Assume that the board of directors declares a $54,500 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? Distributed to Shareholders Common Amount Preferred Total dividend declared Year 1 Arrearage 10,455 Year 2 Preferred dividends 10,455 10.455 Available for common Distributed to common Total distribution < Required A
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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What is the amount of common stock?
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### Corporate Finance Scenario: Dividend Distribution
#### Data Provided:
- **Net available earnings**:
- **Year 1**: $150,000
- **Year 2**: $(15,000) (loss)
- **Preferred stock**:
- 4,100 shares at $100 par, cumulative dividend rate of 7%
- **Cash Dividends Declared by the Board of Directors**:
- **Year 1**: $25,000
- **Year 2**: $54,500
#### Required Calculations:
a. **Distribution of Total Dividends among Preferred and Common Shareholders (Year 1 and Year 2)**
##### Total Dividend Declared:
| Year | Total Dividend Declared |
|------|-------------------------|
| 1 | $25,000 |
| 2 | $54,500 |
##### Available for Common Shareholders:
| Year | Available for Common Shareholders |
|------|-----------------------------------|
| 1 | $0 |
| 2 | $10,455 |
##### Distributed to Shareholders:
| Year | Preferred Shareholders | Common Shareholders |
|------|------------------------|---------------------|
| 1 | $28,700 | $0 |
| 2 | $10,455 | $0 |
##### Total Distribution:
| Total Distribution | Preferred | Common |
|--------------------|-----------|--------|
| Distributed to | $10,455 | $10,455|
b. **Preferred Dividends in Arrears at the End of Year 2**
- Year 1: **Cumulative Preferred Dividends** = 4100 shares \* $100 par \* 7% = $28,700
- Year 2: **Cumulative Preferred Dividends** = $8,445 (after paying Year 1 dividends)
**Note:** Unpaid Year 1 preferred dividends are deferred to Year 2.
c. **Division Method of Preferred and Common Shareholders**
Total preferred dividends are cumulative and must be paid before any common dividends. If there is a loss, cumulative dividends continue to accumulate.
### Instructions for Submission:
Complete this scenario by entering answers in the provided tabs below (e.g., Required A, Required B
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