Question

McNamara Limited's ledger shows the following balances on December 31, 2020:

Preferred shares outstanding: 25,000 shares	$  625,000
Common shares outstanding: 40,000 shares	3,000,000
Retained earnings	890,000

Instructions

Assuming that the directors decide to declare total dividends in the amount of $445,000, determine how much each class of shares should receive under each of the conditions that follow. Note that one year's dividends are in arrears on the preferred shares, which pay a dividend of $1.50 per share.

a.  

The preferred shares are cumulative and fully participating. Round the intermediate percentage calculation to four decimal places and the final amount to the nearest dollar.

b.  

The preferred shares are non-cumulative and non-participating. Round to the nearest dollar.

c.  

The preferred shares are non-cumulative and are participating in distributions in excess of a 10% dividend rate on the common shares. Round the intermediate percentage calculation to four decimal places and the final amount to the nearest dollar.

Answer 1

A)	The preferred stock is cumulative and fully participating :
	Preferred	Common
	$ 138,793	$ 306,207
B)	The preferred stock is Non cumulative and Non participating :
	Preferred	Common
	$ 37,500	$ 407,500
C)	The preferred stock is Non cumulative and is participating in distributions
	in excess of 10 % dividend rate on common stock :
	Preferred	Common
	$ 56,034	$ 388,966

EXPLANATION IS GIVEN BELOW :

A)	The preferred stock is cumulative and fully participating :
	Annual dividends for preferred stock = $ 37,500
	( 25000 shares * $ 1.50 per share )
	Here Preferred stock is cumulative so, one year's dividends
	are in arrears payable to preferred shareholders
	Hence, dividends payable to preferred shareholders = $ 75,000
	{$ 37,500 ( in arrears )+ $ 37,500 ( current year )}
	Remaining dividends = $ 445,000 - $ 75,000 = $ 370,000
	Here, The preferred stock is fully participating
	Total capital value = $ 3,000,000 ( equity )+ $ 625,000 ( preferred )
	Total capital value = $ 3,625,000
	percentage of remaining dividends = remaining dividends / total capital value
	percentage of remaining dividends = $ 370,000 / $ 3,625,000
	So, percentage of remaining dividends = 10.2069 % of capital value ( rounded to 4 decimal )
	Total Dividends :
	Preferred stock = { $ 75,000 + ($ 625,000 * 10.2069 %)}
	Preferred stock = $ 138,793
	Common stock = { $ 445,000 - $ 138,793 }
	Common stock = $ 306,207

B)	The preferred stock is Non cumulative and Non participating :
	Annual dividends for preferred stock = $ 37,500
	( 25000 shares * $ 1.50 per share )
	Here Preferred stock is Non cumulative so, one year's dividends
	are in arrears not payable to preferred shareholders
	Hence, dividends payable to preferred shareholders = $ 37,500
	{$ 37,500 ( current year )only }
	Remaining dividends = $ 445,000 - $ 37,500= $ 407,500
	Here, The preferred stock is Non participating
	so, Entire remaining dividends payable to common stock
	shareholders that is $ 407,500
	Total Dividends :
	Preferred stock = $ 37,500
	Common stock = $ 407,500

C)	The preferred stock is Non cumulative and is participating in distributions
	in excess of 10 % dividend rate on common stock :
	Annual dividends for preferred stock = $ 37,500
	( 25000 shares * $ 1.50 per share )
	Here Preferred stock is Non cumulative so, one year's dividends
	are in arrears not payable to preferred shareholders
	Hence, dividends payable to preferred shareholders = $ 37,500
	{$ 37,500 ( current year )only }
	Remaining dividends = $ 445,000 - $ 37,500= $ 407,500
	Here, The preferred stock is participating in distributions in excess of
	10 % dividend rate on common stock
	So, $ 3,000,000 * 10 % = $ 300,000
	Remaining dividends = { $ 407,500   - $ 300,000} = $ 107,500
	Total capital value = $ 3,000,000 ( equity )+ $ 625,000 ( preferred )
	Total capital value = $ 3,625,000
	percentage of remaining dividends = remaining dividends / total capital value
	percentage of remaining dividends = $ 107,500 / $ 3,625,000
	So, percentage of remaining dividends = 2.9655 % of capital value ( rounded to 4 decimal )
	Total Dividends :
	Preferred stock = { $ 37,500 + ($625,000 * 2.9655 %)}
	Preferred stock = $ 56,034
	Common stock = { $ 300,000 + ($ 107,500 - ($ 625,000* 2.9655 % }
	Common stock = { $ 300,000 + ($ 107,500 - $ 18,534}
	Common stock = $ 300,000 +$ 88,966
	Common stock = $ 388,966