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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Keener Company has had 1,000 shares of 7%, $100 par preferred stock and 40,000 sl1ares of $5 stated-value common stock outstanding for the last 3 years. During that period, dividends paid totaled $6,000, $28,000, and $30,000 for each year, respectively.

Required:

Compute the amount of dividends that Keener must have paid to preferred shareholders and common shareholders in each of the 3 years, given the following 3 independent assumptions:

  1. 1. Preferred stock is nonparticipating and noncumulative.
  2. 2. Preferred stock is nonparticipating and cumulative.
  3. 3. Preferred stock is fully participating and cumulative.

To determine

Calculate the amount of dividend Company K must pay to its preferred shareholders and common shareholders in each of the 3 years.

    1. Preferred stock is nonparticipating and noncumulative.

    2. Preferred stock is nonparticipating and cumulative.

    3. Preferred stock in fully participating and cumulative.

Explanation

Dividends:

This is the amount of cash distributed to stockholders by a company out its earnings, according to their proportion of shares invested in the company.

Calculate the amount of dividend Company K must pay to its preferred shareholders and common shareholders in each of the 3 years when preferred stock is nonparticipating and noncumulative.

YearParticularsPreferred stockCommon stockTotal
Year 1Preferred stock $6,000 $0 -
 Total$6,000$0$6,000
     
Year 2Current preferred dividend (1,000×$100×7%)  7,000$0 -
 Remainder to  common $0 $21,000 -
 Total$7,000$21,000$28,000
     
Year 3Current preferred dividend$7,000 $0 -
 Remainder to  common $0 $23,000 -
 Total$7,000$23,000$30,000

(Table 1)

Calculate the amount of dividend Company K must pay to its preferred shareholders and common shareholders in each of the 3 years when preferred stock is nonparticipating and cumulative.

YearParticularsPreferred stockCommon stockTotal
Year 1Preferred stock ($1,000 is in arrears)$6,000 $0 -
 Total$6,000$0$6,000
     
Year 2Dividend in arrears  $              1,000 $0 -
 Current preferred dividend  $              7,000 $0  
 Remainder to  common $0 $20,000 -
 Total$8,000$20,000$28,000
     
Year 3Current preferred dividend$7,000 $0 -
 Remainder to  common $0 $23,000 -
 Total$7,000$23,000$30,000

(Table 2)

Calculate the amount of dividend Company K must pay to its preferred shareholders and common shareholders in each of the 3 years when preferred stock in fully participating and cumulative.

YearParticularsPreferred stockCommon stockTotal
Year 1Preferred stock ($1,000 is in arrears)$6,000 $0 -
 Total$6,000$0$6,000
     
Year 2Dividend in arrears  $           1,000 $0 -
 Current preferred dividend  $           7,000 $0  
 Common proportional share  (40,000×$5×7%)-$14,000  
 Remainder to  common (2) 2000(3) 4000-
 Total$10,000$18,000$28,000
     
Year 3Current preferred dividend$7,000 $0 -
 Common proportional share $0 $14,000  
 Remainder to  common (5) $3,000(6) $6,000-
 Total$10,000$20,000$30,000

(Table 3)

Working notes:

(1) Calculate the amount of extra dividend for the Year 2:

Extra dividend for the year 2 =(Total amount of dividend during the Year 2)(Dividend in arrears+Current preferred dividend+Common stock proportional share)=$28,000($1,000+$7,000+$14,000)=$28,000$22,000=$6,000

(2) Calculate the amount of dividend transferred from preferred stock to common:

Amount of dividend remaining in the preferred stock }=A

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