Question

2.

Dividends on preferred stock.

It is assumed that the corporation has $800,000 of 5% preferred stock and $3,200,000 of common stock outstanding, each having a par value of $10.  No dividends have been declared for 2016 and 2017.

(a)     As of 12/31/18, it is desired to distribute $250,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative?

2.

Bond issue price and premium amortization.

On January 1, 2018, Piper Co. issued ten-year bonds with a face value of $4,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:

	Present value of 1 for 10 periods at 10%	.386
	Present value of 1 for 10 periods at 12%	.322
	Present value of 1 for 20 periods at 5%	.377
	Present value of 1 for 20 periods at 6%	.312
	Present value of annuity for 10 periods at 10%	6.145
	Present value of annuity for 10 periods at 12%	5.650
	Present value of annuity for 20 periods at 5%	12.462
	Present value of annuity for 20 periods at 6%	11.470

Instructions

(a)     Calculate the issue price of the bonds.

(b)     Without prejudice to your solution in part (a), assume that the issue price was $3,542,000. Prepare the amortization table for 2018, assuming that amortization is recorded on interest payment dates using the effective-interest method.

Answer 1

2) Dividend distribution

Annual preferred dividend = 800000*5% = 40000

	Total	Preferred	Common
Dividend distribution	250000	40000*3 = 120000	250000-120000 = 130000

3a) Issue price of bonds = (4000000*5%*11.47)+(4000000*0.312) = $3542000

3b) Amortization table

	Cash interest	Interest expense	Discount amortization	Carrying value
Jan 1				3542000
June 30	4000000*5% = 200000	3542000*6% = 212520	12520	3554520
Dec 31	200000	213271	13271	3567791