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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Edgefield Corporation has issued 10%, participating, cumulative preferred stock with a total par value of $22,000 and common stock with a total par value of $66,000. Therefore, the preferred stock par value is 1/4 and the common stock par value is 3/4 of the total par value. Edgefield intends to distribute cash dividends of $14,000, and there are no dividends in arrears. What is the dividend distribution to each class of stock if the preferred stock is fully participating?

To determine

Identify the dividend distribution for each class of stock when preferred stock is fully participating.

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.

Identify the dividend distribution for each class of stock when preferred stock is fully participating.

Particulars Amount in $Preferred stock Amount in $Common stock Amount in $
10% dividend to preferred (on $22,000 par)  2,200 
Common dividend (equal to 10% of $66,000 par)  6,600
Extra dividend proportionate to par values:   
Total to allocate 14,000  
Allocated ($2,200 + $6,600)(8,800)  
Remainder (1/4 to preferred, 3/4 to common) 5,200(1) 1,300(2) 3,900
Dividends to each class of stock  3,50010,500

(Table 1)

Working note:

(1) Calculate the remaining 1/4 of preferred stock:

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