Question

E14-2 Knudsen Corporation was organized on January 1, 2016. During its first year, the corporation issued 2,000 shares of $50 par value preferred stock and 100,000 shares of $10 par value common stock. At December 31, the company declared the following cash dividends: 2016, $5,000; 2017, $12,000; and 2018, $28,000.

Instructions

(a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 6% and noncumulative.

(b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 7% and cumulative.

(c) Journalize the declaration of the cash dividend at December 31, 2018, under part (b).

Answer 1

Preferred Stock:

Number of shares = 2,000
Par Value = $50

Value of Preferred Stock = Number of shares * Par Value
Value of Preferred Stock = 2,000 * $50
Value of Preferred Stock = $100,000

Common Stock:

Number of shares = 100,000

Answer a.

Preferred Stock Dividend = Value of Preferred Stock * Dividend Rate
Preferred Stock Dividend = $100,000 * 6%
Preferred Stock Dividend = $6,000

Answer b.

Preferred Stock Dividend = Value of Preferred Stock * Dividend Rate
Preferred Stock Dividend = $100,000 * 7%
Preferred Stock Dividend = $7,000

Preferred Stock Dividend arrear in 2016 to be paid in 2017 = $2,000

Answer c.