Chapter 20, Problem 2SEB

To determine

Prepare the dividend allocation between preferred and common shares in total and per share.

Explanation of Solution

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Preferred stock:

Preferred stock provides certain preferences or rights to its owners while compared to common stock. Generally, preferred stock holders are given the right to receive dividends and distribution of assets during the process of liquidation.

Cumulative Preferred Stock:

This feature implies that a preferred stockholder is entitled to receive dividends for the current year plus any unpaid dividends of the previous years, before the dividends are paid to the common stockholders.

 Non-Cumulative Preferred Stock:

A non-cumulative preferred stock implies that a preferred stockholder is entitled to receive dividends for the current year alone; any unpaid dividends will never be paid.

The dividend allocation between preferred and common shares in total and per share is prepared as follows:

Situation 1:

Particulars	Amount
Total amount available for dividends	$50,000
Less: Dividends to preferred stock (1)	$18,000
Amount available for common stock	$32,000
Dividends per share:
Preferred stock	$2.00
Common stock (2)	$0.32

Table (1)

Working note:

(1) Calculate the dividends available for preferred stock in total:

$\begin{array}{c}\begin{array}{l}\text{Dividends}\text{available}\\ \text{for}\text{preferred}\text{stock}\end{array}\}\text{=}\text{Number}\text{of}\text{shares}\text{×}\text{Diviend}\text{rate}\\ \text{=}9\text{,000}\text{shares}\text{×}\text{\$2}\\ \text{=}\text{\$18,000}\end{array}$

(2) Calculate the dividend per share of common stock:

$\begin{array}{c}\begin{array}{l}\text{Dividend}\text{per}\text{share}\\ \text{of}\text{common}\text{stock}\end{array}\}\text{=}\frac{\text{Total}\text{dividends}\text{available}\text{for}\text{common}\text{stock}}{\text{Total}\text{Number}\text{of}\text{shares}\text{in}\text{common}\text{stock}}\\ \text{=}\frac{\text{\$32,000}}{\text{\$100,000}}\\ \text{=}\text{\$0}\text{.32}\end{array}$

The dividend allocation between preferred and common shares in total and per share is prepared as follows:

Situation 2:

Particulars	Amount	Amount	Amount
Total amount available for dividends			$56,000
Dividends to Cumulative preferred stock:
From prior year (4)	$8,000
Current year (5)	$8,000
Total cumulative preferred stock dividends (3)		$16,000
Dividends to Non-Cumulative preferred stock:
Current year (6)		$10,000
Total preferred stock dividends			$26,000
Amount available for common stock			$30,000
Dividends per share:
Preferred cumulative (7)	$4
Preferred noncumulative (8)	$2
Common stock (9)	$0.75

Table (2)

Working note:

(3) Calculate the dividends available for cumulative preferred stock in total:

$\begin{array}{c}\begin{array}{l}\text{Dividends}\text{available}\text{for}\\ \text{cumulative}\text{preferred}\text{stock}\end{array}\}\text{=}\left(\begin{array}{l}\text{Dividends}\text{to}\text{cumulative}\text{preferred}\text{stock}\text{from}\text{prior}\text{year}\text{+}\\ \text{Dividends}\text{to}\text{cumulative}\text{preferred}\text{stock}\text{current}\text{year}\end{array}\right)\\ \text{=}\text{\$8,000}\text{(4)+\$8,000}\text{(5)}\\ \text{=}\text{\$16,000}\end{array}$

(4) Calculate the dividends to cumulative preferred stock from prior year:

$\begin{array}{c}\begin{array}{l}\text{Dividends}\text{to}\text{cumulative}\\ \text{preffered}\text{stock}\text{prior}\text{year}\end{array}\}\text{=}\text{Number}\text{of}\text{shares}\text{×}\text{Dividend}\text{rate}\\ \text{=}4\text{,000}\text{shares}\text{×}\text{\$2}\\ \text{=\$8,000}\end{array}$

(5) Calculate the dividends to cumulative preferred stock for current year:

$\begin{array}{c}\begin{array}{l}\text{Dividends}\text{to}\text{cumulative}\\ \text{preffered}\text{stock}\text{current}\text{year}\end{array}\}\text{=}\text{Number}\text{of}\text{shares}\text{×}\text{Dividend}\text{rate}\\ \text{=}4\text{,000}\text{shares}\text{×}\text{\$2}\\ \text{=\$8,000}\end{array}$

(6) Calculate the dividends available for non-cumulative preferred stock in total for current year:

$\begin{array}{c}\begin{array}{l}\text{Dividends}\text{available}\text{for}\text{non-cumulative}\\ \text{preferred}\text{stock}\text{during}\text{current}\text{year}\end{array}\}\text{=}\text{Number}\text{of}\text{shares}\text{×}\text{Dividend}\text{rate}\\ \text{=}5\text{,000}\text{shares}\text{×}\text{\$2}\\ \text{=\$10,000}\end{array}$

(7) Calculate the dividend per share of cumulative preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Dividend}\text{per}\text{share}\text{of}\\ \text{cumulative}\text{preferred}\text{stock}\end{array}\}\text{=}\frac{\left(\begin{array}{l}\text{Total}\text{dividends}\text{available}\text{for}\\ \text{cumulative}\text{preferred}\text{stock}\end{array}\right)}{\left(\begin{array}{l}\text{Total}\text{Number}\text{of}\text{shares}\text{in}\\ \text{cumulative}\text{preferred}\text{stock}\end{array}\right)}\\ \text{=}\frac{\text{\$16,000}\text{(3)}}{\text{\$4,000}}\\ \text{=}\text{\$4}\end{array}$

(8) Calculate the dividend per share of non-cumulative preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Dividend}\text{per}\text{share}\text{of}\\ \text{non-cumulative}\text{preferred}\text{stock}\end{array}\}\text{=}\frac{\left(\begin{array}{l}\text{Total}\text{dividends}\text{available}\text{for}\\ \text{non-cumulative}\text{preferred}\text{stock}\end{array}\right)}{\left(\begin{array}{l}\text{Total}\text{Number}\text{of}\text{shares}\text{in}\\ \text{non-cumulative}\text{preferred}\text{stock}\end{array}\right)}\\ \text{=}\frac{\text{\$10,000}\text{(6)}}{\text{\$5,000}}\\ \text{=}\text{\$2}\end{array}$

(9) Calculate the dividend per share of common stock:

$\begin{array}{c}\begin{array}{l}\text{Dividend}\text{per}\text{share}\\ \text{of}\text{common}\text{stock}\end{array}\}\text{=}\frac{\text{Total}\text{dividends}\text{available}\text{for}\text{common}\text{stock}}{\text{Total}\text{Number}\text{of}\text{shares}\text{in}\text{common}\text{stock}}\\ \text{=}\frac{\text{\$30,000}}{\text{\$40,000}}\\ \text{=}\text{\$0}\text{.75}\end{array}$