Chapter 20, Problem 2SEB

### College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

Chapter
Section

### College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

# DIVIDEND ALLOCATIONSSituation 1 Espino Company has the following stock outstanding: Common Stock Preferred Stock 100,000 shares 9,000 shares $0.50 par value$20 par, $2 dividend The amount available for dividends this year is$50,000. Prepare the dividend allocation between the preferred and common shares.Situation 2 Chiola Corporation has the following stock outstanding: Common Stock Preferred Stock 40,000 shares Cumulative: 4,000 shares $1 par value$40 par, $2 dividend Noncumulative: 5,000 shares$40 par, $2 dividend No dividends were declared in year 1 of operation. In year 2, there is$56,000 available for dividends. Prepare the dividend allocation between the preferred and common shares.

To determine

Prepare the dividend allocation between preferred and common shares in total and per share.

Explanation

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 in the form of dividend.

Preferred stock:

Preferred stock provides certain preferences or rights to its owners while compared to common stock. Generally, preferred stock holders are given the right to receive dividends and distribution of assets during the process of liquidation.

Cumulative Preferred Stock:

This feature 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 are paid to the common stockholders.

Â Non-Cumulative Preferred Stock:

A non-cumulative preferred stock implies that a preferred stockholder is entitled to receive dividends for the current year alone; any unpaid dividends will never be paid.

The dividend allocation between preferred and common shares in total and per share is prepared as follows:

Situation 1:

 Particulars Amount Total amount available for dividends $50,000 Less: Dividends to preferred stock (1) Â$18,000 Amount available for common stock $32,000 Dividends per share: Â Preferred stock$2.00 Common stock (2) $0.32 Table (1) Working note: (1) Calculate the dividends available for preferred stock in total: Dividendsâ€‰availableâ€‰forâ€‰preferredâ€‰stock}=â€‰Numberâ€‰ofâ€‰sharesâ€‰Ã—â€‰Diviendâ€‰rate=â€‰9,000â€‰sharesâ€‰Ã—â€‰$2=â€‰$18,000 (2) Calculate the dividend per share of common stock: Dividendâ€‰perâ€‰shareâ€‰ofâ€‰commonâ€‰stock}â€‰=â€‰Totalâ€‰dividendsâ€‰availableâ€‰forâ€‰commonâ€‰stockTotalâ€‰Numberâ€‰ofâ€‰sharesâ€‰inâ€‰commonâ€‰stock=â€‰$32,000$100,000=â€‰$0.32

The dividend allocation between preferred and common shares in total and per share is prepared as follows:

Situation 2:

 Particulars Amount Amount Amount Total amount available for dividends Â Â $56,000 Dividends to Cumulative preferred stock: Â Â Â From prior year (4)$8,000 Â Â Current year (5) $8,000 Â Â Total cumulative preferred stock dividends (3) Â$16,000 Â Dividends to Non-Cumulative preferred stock: Â Â Â Current year (6) Â $10,000 Â Total preferred stock dividends Â Â$26,000 Amount available for common stock Â Â $30,000 Dividends per share: Â Â Â Preferred cumulative (7) Â$4 Â Â Preferred noncumulative (8) Â $2 Â Â Common stock (9) Â$0.75 Â Â

Table (2)

Working note:

(3) Calculate the dividends available for cumulative preferred stock in total:

Dividendsâ€‰availableâ€‰forcumulativeâ€‰preferredâ€‰stock}=â€‰(Dividendsâ€‰toâ€‰cumulativeâ€‰preferredâ€‰stockâ€‰fromâ€‰priorâ€‰yearâ€‰+â€‰Dividendsâ€‰toâ€‰cumulativeâ€‰preferredâ€‰stockâ€‰currentâ€‰year)=â€‰$8,000â€‰(4)+$8,000â€‰(5)=â€‰\$16,000

(4) Calculate the dividends to cumulative preferred stock from prior year:

Dividendsâ€‰toâ€‰cumulativeprefferedâ€‰stockâ€‰priorâ€‰year}â€‰=â€‰

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