Question

Wildhorse Company’s ledger shows the following balances on December 31, 2017.

4% Preferred Stock—$10 par value, outstanding 20,000 shares $ 200,000

Common Stock—$100 par value, outstanding 32,100 shares 3,210,000

Retained Earnings 652,000

Assuming that the directors decide to declare total dividends in the amount of $360,000, 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. the answer is not 16000, or 344,000 for preferred and common respectively.

(b) The preferred stock is noncumulative and nonparticipating.
(c) The preferred stock is noncumulative and is participating in distributions in excess of a 7% dividend rate on the common stock

Answer 1

Solution

A. Preferred stock is cumulative, fully participating:

	Preferred	common	total
Dividend in arrears (4%×$10×20000)	8000		8000
Current dividend:
Preferred	8000
Common (4%×$100×32100)		128400	136400
Balance dividend pro-rata	12645 {[200000/(200000+3210000) ]×215600}	202955 [(3210000/3410000) ×215600)	215600 (360000-136400-8000)
Total	28645	331355	360000

B. Preferred stock is non cumulative and Nonparticipating:

Preferred dividend (current dividend)=$8000

Remaining all to common =$360000-8000

=$352,000

C. Preferred stock is non cumulative and participating in distribution in excess of 7%:

	Preferred	common	total
Current year:
Preferred (4%×$10×20000)	8000		8000
Common (4%×$100×32100)		128400	128400
Additional 3% to common (3%×3210000(		96300	96300
Balance dividend pro-rata	7466 [(200000/3410000) ×127300]	119834 [(3210000/3410000) ×127300)	127300 (360000-8000-128400-96300)
Total	15466	344534	360000