Question

Bonita Company’s ledger shows the following balances on December 31, 2020.

7% Preferred Stock—$10 par value, outstanding 21800 shares		$ 218000
Common Stock—$100 par value, outstanding 32300 shares		3230000
Retained Earnings		572000

Assuming that the directors decide to declare total dividends in the amount of $346000, determine how much each class of stock should receive under each of the conditions stated below. One year‘s dividends are in arrears on the preferred stock.

(a) The preferred stock is cumulative and fully participating. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to 0 decimal places, e.g. $38,487.)

Preferred		Common
$		$

(b) The preferred stock is noncumulative and nonparticipating. (Round answers to 0 decimal places, e.g. $38,487.)

Preferred		Common
$		$

(c) The preferred stock is noncumulative and is participating in distributions in excess of a 10% dividend rate on the common stock. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to 0 decimal places, e.g. $38,487.)

Preferred		Common
$		$

Answer 1

a)In case of cumulative preferred stock ,any dividend in arrear is paid in preference to current year preferred and common stock dividend.

Preferred dividend =par value *dividend rate

             = 218000*7%

              =15260

	Preferred	common
Dividend in arrear	15260
current year preferred dividend	15260
common stock dividend (up to preferred dividend rate)		3230000*7%=226100
Participating dividend	5651	83729
Total dividend	36171	309829

Remaining dividend of Total dividend - preferred dividend -common stock dividend

                               = 346000 -15260 -15260 - 226100 = 89380

to be distributed in par value.

Total par value :218000 preferred stock +3230000 common stock = 3448000

pro --rata allocation of remaining dividend :remaining dividend /total par value

                      = 89380/3448000 = 2.5922%

Preferred =218000*2.5922%= 5651

common stock = 3230000*2.5922%= 83729

b)

	Preferred	common stock
preferred dividend	15260	346000-15260= 330740

c)

	Preferred	common
current year preferred dividend	15260
common stock dividend		3230000*10%=323000
Participating dividend	489	7251
Total dividend	15749	330251

Remaining dividend of Total dividend - preferred dividend -common stock dividend

                               = 346000-15260-323000

                               = 7740

to be distributed in par value.

Total par value :218000 preferred stock +3230000 common stock = 3448000

pro --rata allocation of remaining dividend :remaining dividend /total par value

                      = 7740/3448000 = .2245%

Preferred =218000*.2245%= 489

common stock = 3230000*.2245%= 7251