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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Dividends per share

Lightfoot Inc., a software development firm, has stock outstanding as follows: 40,000 shares of cumulative preferred 1% stock, $125 par, and 100,000 shares of $150 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $36,000; second year, $58,000; third year, $75,000; fourth year, $124,000. Compute the dividends per share on each class of stock for each of the four years.

To determine

Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation. The dividend payments are not guaranteed and are paid after the payment made to the preferred stockholders.

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

A preferred stock may be cumulative and non-cumulative. A cumulative preferred stock implies that a preferred stockholder is entitled to receive dividends for the current year plus any unpaid dividends of the previous years, before the dividends paid to the common stockholders.

Dividend per share:

Dividend per share represents the amount of dividend paid to each shareholders of the business.

To determine: The dividends per share for preferred and common stock for each year.

Explanation

Determine the dividends per share for preferred and common stock for each year.

Particulars Year 1 Year 2 Year 3 Year 4
Total dividends declared (a) $36,000 $58,000 $75,000 $124,000

Preferred dividend

(For current year) (b)

$36,000 $44,000 $50,000 $50,000
Preferred dividend in arrears (c) $0 $14,000 $6,000 $0

Total preferred dividends

(d) = (b) + (c)

$36,000 $58,000 $56,000 $50,000
Common dividend (e) = (a) (d) $0 $0 $19,000 $74,000
 
Dividend per share:

   Preferred stock

   (Total preferred dividend(d)40,000 preference shares)

$0.90 $1.45 $1.40 $1.25

  Common stock

  (Common dividend(e)100,000 common shares)

$0 $0 $0.19 $0.74

Table (1)

Working note:

Calculate the amount to be paid as preferred dividend each year

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