Question

Problem 5 Frank Company paid cash dividends at the end of each of its first three years of operation as follows: 2017 2018 2019 $ 105,000 $ 82,000 $ 960,000 The company's balance sheet showed the following accounts throughout the three-year period: 400,000 shares of $3 par common stock Paid-in capital in excess of par, common 80,000 shares of 8% preferred, $25 par stock Paid-in capital in excess of par, preferred $1,200,000 $1,700,000 $2,000,000 $3,600,000 a. Determine the amount of total dividends paid on common and preferred stock for each year, assuming that the preferred stock is cumulative and non-participating. Show your work! Preferred Common 2017 Arrears 105.000 55000 2018 82,000 48000): 133000 2019 293.000 661,000 133000 + 160000 b. 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 Arrears Common 2017 55000 2018 82.00 418000) - 133000 2019 /barpo versu ner pay 960000, subtracts arrears & anal P.S. 9600000 - 33000 - 160000 416815 2018 105.000 we 667000 to split out *133000 P.S.:.625x667000-416875 +168000 C.S.: .375 667000 € 250125 709815 PS total P.S. - 511000X,625 = 356875 960000 - 133000 C.S.2591000x, 375=214125 - 160000 356875 214125 - 96000 12000007.08 + 9600D +133000 $571.000 310125 C.S. 649875 F.S. total 160000 total

pls explain each step in detail. I dont get it

Answer 1

Requirement (a)
Cumulative and non-participating preferred shares: Cumulative indicates that, if the current year profits are not sufficient to satisfy the minimum preferred dividend (in this case 8%), the shortage amount shall be cumulated in the form of arrears and will be paid in the year when there are sufficient profits.
Non-participating indicates that, the preferred shares are only entitled to fixed rate of dividend (in this case 8%). If there is any additional profit earned during the year, the common stock holders will only be entitled to it.

Therefore, with the above understanding, let us determine the dividends:

Fixed dividend to Preferred shareholders:

No. of Shares	80000
Par value per share	25
Dividend rate per share	8%
Dividend amount per share	2
Total Dividend	160000

Therefore, on the basis of the above, Profits earned by the company are distributed as under:

Year	Profit earned	Preference Dividend due	Preference Dividend paid	Arrears of Preference Dividend	Balance Utilized for Common Shares
2017	105000	160000	105000	55000 - Due	0	The profit earned is insufficient to meet the fixed Preferred dividend	Therefore, Arrears = 160000 - 105000 = 55000
2018	82000	160000	82000	78000 - Due	0	The profit earned is insufficient to meet the fixed Preferred dividend	Therefore, Arrears = 160000 - 82000 = 78000
							Total Arrears = 55000 + 78000 = 133000
2019	960000	160000	160000	133000 - Paid	667000	The profit earned is sufficient to meet the arrears of fixed Preferred dividend along with the current years fixed Preferred dividend
						The balance profit is entirely used to issue as dividend to the common stock holders

Requirement (b)
Cumulative and participating preferred shares: Cumulative indicates that, if the current year profits are not sufficient to satisfy the minimum preferred dividend (in this case 8%), the shortage amount shall be cumulated in the form of arrears and will be paid in the year when there are sufficient profits.
Participating indicates that, the preferred shares are entitled to fixed rate of dividend (in this case 8%). Further, If there is any additional profit earned during the year, the preferred share holders do have a claim to that as well.
However, this additional dividend is paid only after the common stock holders have been allocated their minimum share of dividend in the surplus profit (in this case 8%).

Therefore, with the above understanding, let us determine the dividends:

Fixed dividend to Preferred shareholders:

No. of Shares	80000
Par value per share	25
Dividend rate per share	8%
Dividend amount per share	2
Total Dividend	160000

Therefore, on the basis of the above, Profits earned by the company are distributed as under:

Year	Profit earned	Preference Dividend due	Preference Dividend paid	Arrears of Preference Dividend	Minimum Dividend Paid to Common Stock holders (@8% of 1200000)	Balance to be proportionately allocated
2017	105000	160000	105000	55000 - due		0
2018	82000	160000	82000	78000 - due		0
2019	960000	160000	160000	133000 - paid	96000	571000

The Balance available profit of 571000 is to be distributed among the Preferred shareholders and common shareholders on the basis of Share Capital Ratio.

Share Capital Ratio is computed as under:

Particulars	Amount	Ratio
Common Share Capital	1200000	0.375 (1200000/3200000)
Preferred Share Capital	2000000	0.625 (2000000/3200000)
	3200000

Therefore, Allocation of Balance available Profit:

Particulars	Ratio	Available Profit = 571000
Common Share Capital	0.375	214125
Preferred Share Capital	0.625	356875
		571000

Therefore, Total Profits Distributed in the year 2019 are:

Particulars	Arrears of Dividend	Minimum Dividend	Allocated Dividend	Total Dividend
Preferred Share Capital	133000	160000	356875	649875
Common Share Capital	0	96000	214125	310125
				960000