Question

For all of 2019 and 2020, Gentry had the following stock issued and outstanding: Preferred: 7,000 shares, 5%, $50 par value per share Common: 8,000 shares, $20 par value per share For 2020, Gentry declared a dividend of $40,000. For 2019, Gentry paid a preferred dividend of $2,000. Required: (1) For each of the three independent cases below, find how the $40,000 dividend for 2020 is payable to preferred and common shareholders. Use a format similar to that provided for E15-22 in the course packet. Show calculations below each case. (2) Discuss how your answer to 1(b) would change if there were 1,000 common treasury shares in addition to the 8,000 common shares outstanding. 1.a Preferred is cumulative and nonparticipating. Preferred Common Total Dividends in arrears Current year's dividend Remainder to common Totals 1.b Preferred is noncumulative but is fully participating. Preferred Common Total Dividends in arrears Current year's dividend Participating dividend Totals

Answer 1

1a)

	Preferred	common	total
Dividends in arrears	$15500	-	$15500
Current years dividend	$17500	$7000	$24500
Reminder to common	-	-	-
Total	$33000	$7000	$40000

Calculations -

Annual dividend of preferred = 7000×$50×5% = $17500.

Unpaid dividend of preferred for 2019 = $17500 - $2000 = $15500.

Current year dividend to common = $40000 - ($15500+$17500)

= $40000 - $33000

= $7000

1b)

	Preferred	common	total
Dividends in arrears	-	-	-
Current years dividend	$27451	$8000	$35451
Reminder to common	-	$4549	$4549
Total	$27451	$12549	$40000

Calculations-

Dividends in arrears to be paid in 2020 = $0 , because preferred stock is non cumulative. So $15500 which is unpaid in 2019 is not paid in 2020.

Current year dividend to preferred (annual)  = 7000×$50×5% = $17500

Current year dividend to common = 8000×$20×5% = $8000

Surplus = $40000 -($17500+$8000)

= $40000 - $25500

= $14500

Ratio of preferred and common for surplus dividend = (7000×$50):(8000×$20)

= $350000:$160000

= 35:16

Current year dividend to preferred (out of surplus) = $14500×[35/(35+16)]

= $14500×[35/51]

= $14500×0.6863

= $9951

Total current year dividend to preferred = $17500+$9951 = $27451

Reminder to common = $40000 - ($17500+$8000+$9951)

= $40000 - $35451

= $4549

1c)

	Preferred	common	total
Dividends in arrears	$15500	-	$15500
Current years dividend	$17500	$7000	$24500
Reminder to common	-	-	-
Total	$33000	$7000	$40000

Calculations-

Dividends in arrear = $15500

Current year dividend to preferred = 7000×$50×5% = $17500

Remaining amount = $40000 -($15500+$17500)

= $40000 -$33000

= $7000

But at the rate of 5%, common stockholders have to get $8000. So in this case there is no surplus and extra for preferred. This $7000 is given to common stockholders as current year dividend.

2. No change

Explanation-

Treasury stock is not entitled to any dividends as these are owned by the company itself. So company can't pay dividends to itself. As a result, if there were 1000 treasury common stock there is no change in the 1b) answer as dividend distribution will be same as given in 1b)