Question

pls show work bc i am very confused

Problem 2 Fairley Company paid cash dividends at the end of each of its first three years of operation as follows: Year 1 Year 2 Year 3 $ 100,000 $ 98,000 $1,260,000 The company's balance sheet showed the following accounts throughout the three-year period: 600,000 shares of $3 par common stock Paid-in capital in excess of par, common 120,000 shares of 6% preferred, $20 par stock Paid-in capital in excess of par, preferred $1,800,000 $4,200,000 $2,400,000 $3,600,000 Determine the amount of total dividends paid on common and preferred stock for each year, assuming that the preferred stock is cumulative and participating. Show your work! Preferred Common Year 1 Year 2 Year 3

Answer 1

Solution:

Cumulative Preferred Stock means the preferred dividend is accumulated to the preferred shareholders. If dividends are not paid in a year or prior periods, the dividends are accumulated till the company paid dividends. Preferred shareholders are given preference over common stockholders in terms of receiving dividends and getting paid at the time of winding up of the company. Hence, the dividends are paid first for preferred shareholders and remaining dividends are distributed in common shareholders.

Yearly Dividends payable to preferred shareholders = 120,000 Shares x 6% x $20 par = $144,000

	Dividends Paid	Preferred Dividend Payable	Preferred Dividends Paid	Common Dividend Paid
Year 1	$100,000	$144,000	$100,000	$0
Year 2	$98,000	$188,000 ($144,000 + Previous Outstanding $44,000)	$98,000	$0
Year 3	$1,260,000	$234,000 ($144,000 + Previous Outstanding $188,000 – Paid $98,000)	$234,000	$1,026,000 ($1,260,000 - $234,000)