Question

The shareholders’ equity of ILP Industries includes the items shown below. The board of directors of ILP declared cash dividends of $10 million, $15 million, and $120 million in its first three years of operation—2018, 2019, and 2020, respectively.

(In Millions)

Common stock $100

Paid-in capital—excess of par, common 800

Preferred stock, 8% 200

Paid-in capital—excess of par, preferred 520

Determine the amount of dividends to be paid to preferred and common shareholders in each of the three years, assuming that the preferred stock is cumulative and nonparticipating.

Answer 1

year	Cash dividend Declared	Preferred Dividends	Common dividend
2018	10	10	0
2019	15	15	0
2020	120	23	97

Working notes for the above answer is as under

1

Cumulative preferred stock dividend for the year

=200x8%

=$16

In the year company should paid preferred stock dividend 16 million if it is not paid in the year then it will be paid in subsequent year

Year	Preferred Dividends Required	Paid	Outstanding
2018	16	10	6 (16-10)
2019	22 (16+6)	15	7 (22-15)
2020	23 (16+7)	23	0

Common stock will be paid dividend what remains after paying preferred stock so in the year 2020 common stock dividend =120-23 =$97 million