Question

The records of Hollywood Company reflected the following balances in the stockholders' equity accounts at the end of the current year:

Common stock, $11 par value, 49,000 shares outstanding

Preferred stock, 12 percent, $9 par value, 9,000 shares outstanding

Retained earnings, $231,000

On September 1 of the current year, the board of directors was considering the distribution of an $76,000 cash dividend. No dividends were paid during the previous two years. You have been asked to determine dividend amounts under two independent assumptions (show computations):

a. The preferred stock is noncumulative.

b. The preferred stock is cumulative.

Required:

1. Determine the total and per share amounts that would be paid to the common stockholders and the preferred stockholders under the two independent assumptions. (Round your "per share" amounts to 2 decimal places.

Answer 1

a.The preferred stock is non cumulative.

No arrears of dividend arise to preferred stock holders if the preferred stock is non cumulative.

so the following will be total and per share amounts to be paid to the shareholders.

	total	per share
preferred stock ($9*9000*12%) (9720/9000 shares)	$9,720	$1.08
common stock ($76,000 -9720=>66,280) ($66,280/49,000 shares)	$66,280	$1.35

b. The preferred stock is cumulative.

since the preferred stock is cumulative, the unpaid dividends of two years will be paid now to the preferred stock holders.

annual preferred dividend = $9*9000*12% =>$9,720.

total preferred dividend for three year will be paid now. (two years unpaid + current year)

	total	per share
preferred stock ($9,720*3 years) ($29,160/9000)	$29,160	$3.24
common stock ($76,000-29,160=>$46,840) ($46,840/49,000 shares)	$46,840	$0.96