Question

U5. 1. (5 points) Cheyenne Corp. had 5,000 shares of 7%, $100 par value preferred stock and 40,000 shares of $5 par value common stock outstanding throughout 2018. No dividends were paid in 2016 or 2017. Determine the dividend amount that should go to common and preferred shareholders for the following scenarios. a. Assuming that total dividends declared in 2018 were $150,000, and that the preferred stock is not cumulative and is not participating. Common Shareholders' Dividends Preferred Shareholders' Dividends Assuming that total dividends declared in 2018 were $150,000, and that the preferred stock is cumulative and is not participating. Common Shareholders' Dividends Preferred Shareholders' Dividends c. Assuming that total dividends declared in 2018 were $150,000, and that the preferred stock is not cumulative and is fully participating. Common Shareholders' Dividends Preferred Shareholders' Dividends d. Assuming that total dividends declared in 2018 were $150,000, and that the preferred stock is cumulative and is fully participating. Common Shareholders' Dividends Preferred Shareholders' Dividends

Answer 1

Explanations

1.Participating Preferred Stock - These are the kind of preferred stock which have the right to participate in the surplus profit of the company. These are the shares where the fixed preference dividend carrying the right to participate in the surplus of profit, but after the dividend at equal rates has been paid on all the equity shares.

2.Non-Participating Preferred Stock - These type of preferred stock does not enjoy the benefits of participating preferred stock. These preferred stock does not enjoy the right in participating in the surplus profits of the company and only fixed amount of dividend is paid on them by the company which has been declared by the company at the time of distribution.

3.Cumulative Preferred Stock - Cumulative preferred stock are those shares on which if the company makes the default on declaring dividend in any year, they carry the right that the arrears of dividend of any previous year will be paid on them before paying any dividend to equity stock.

4.Non-Cumulative Preferred Stock - Non-cumulative preferred stocks are those stock where the shareholder gets a fixed amount of dividend each year but in case if the company fails to pay dividend in any year, the shareholder cannot claim the dividend in future.

a.When preferred stock in non- cumulative and non- participating

Per share   ​​​​​​Total

Preferred Stock

Dividend $100×7% = $7 5,000 shares×$7 = $35,000

Common stock

Dividend $115,000/40,000 $115,000

shares = $2.875 __________

Total $150,000

Explanation: First dividend of $35,000 will be distributed to preferred shareholders and balance of $115,000($150,000-$35,000) will be given to equity shareholders.

b.When preferred stock in cumulative and non-participating

Dividend Arrears Total

Preferred Stock 5,000×$7 (5,000×$7)*2 $105,000

=$35,000 =70,000

Common stock 40,000×$1.125 $45,000

=$45,000 ___________

Total $150,000

Explanation: In this case since preferred stock is cumulative, arrears of dividend for the year 2016 and 2017 will be paid in 2018 before paying any dividend to equity shareholders.After distributing the arrears and dividends to preferred hareholders balance will be paid to equity shareholders.

c.When preferred stock is non-cumulative and fully participating

First determine the normal dividend on preferred stock = $7× 5,000shares $35,000.

Now determine an equal amount of dividend on common stock = $0.875× 40,000shares = $35,000

Now subtract the total $70,000 from the retained earnungs which the company plans to pay as dividends = $150,000 - $70,000 = $80,000.

Now add the total number of preferred stocks to total number of common stocks = 5,000+ 40,000 = 45,000shares

Divide the remaining retained earnings available to be distributed as dividend by total number of shares = $80,000/45,000 shares = $1.778

Dividend for preferred stock = $8.778 × 5,000 shares = $43,890

Dividend for common stock = $2.653 × 40,000 shares = $106,110

Per share Total

Preferred Stock $8.778 $43,890

Common stock $2.653 $106,110

__________

Total $150,000

Explanation: In this case as preferred stock is participating they have been paid out of the surplus profit along with equity shareholders after distributing an equal amount of dividend on common stock

d.When preferred stock is cumulative and fully participating

Current year Dividend on preferred stock =$7×5,000 =$35,000

Arrears on preferred stock = ($7×5,000)*2 = $70,000

Dividend to equity shareholders equal to prferred stock current year's dividend = $35,000

Balance of retained earnings available to be distributed as dividend after paying the above dividends = $150,000 - $140,000 = $10,000

Total number of shares = 45,000 shares

Additional dividend to preferred stock = $10,000/45,000 ×5,000shares = $1,111

Additional dividend to common stock = $10,000/45,000 × 40,000 shares = $8,889.

Total dividend to preferred stock = $35,000 + $1,111=$36,111

Total arrears to preferred stock = $70,000

Total dividned on common stock = $35,000 + $8,889 = $43,889

  Per share Total

Preferred Stock   

Dividend- Current year $36,111/5,000 $36,111

$7.222

Dividend- Arrears $14 $70,000

Common stock $43,889/40,000 $43,889

=$1.097 ______________

Total $150,000

Explanation: In this case preferred stocks are cumulative and participating so first current year's dividend and arrears of dividends of past two years has been distributed to preferred stock than an amount equal to preferred shareholders current year's dividend has been distributed to equity shareholders. After the above, the balance retained earnings availbale for distribution as dividend has been distributed proportionately to common stock and preferred stockholders.