Question

Problem 9 Hoosiers, Inc. has 500,000 shares of no-par common stock and 50,000 shares of $100 par, 10% cumulative preferred stock. For each year below indicate dividends distributed to common and preferred stock. Distributed to Common Stock Distributed to Preferred Stock Total Dividends Distributed $750,000 at the end of 2012 $400,000 at the end of 2013 $550,000 at the end of 2014 $900,000 at the end of 2015

Please show all calculations.

Answer 1

Cumulative preference shares have first right to dividend. In case profits are not enough, the dividends get accumulated and are paid in the period when there is enough profit.

Total dividends distributed	Distributed to common stock	Distributed to preferred stock	Balance yet to be distributed
$ 750,000 at end of 2012	250,000	500,000	NIL
$ 400,000 at end of 2013	0	400,000	100,000
$ 550,000 at end of 2014	0	550,000	100,000 + 500,000 - 550,000 =50000
$ 900,000 at end of 2015	350,000	500,000 +50000 = 550,000	50,000 +500,000 - 550,000 =NIL

In 2012, profits are enough

In 2013, profits can only meet $ 400,000 of dividend of preference and hence $100,000 carried forward

In 2014, $100,000 and $ 500,000 needs to be paid but $ 550,000 is not sufficient. The balance dividend is to be carried forward.

In 2015, the dividend 50,000 and 500,000 is sufficiently met by the profits. The balance is distributed to common stock.

Working note :

Preferred dividend = 50,000 *10% * 100 = $ 500,000

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