Question

When Crossett Corporation was organized in January Year 1, it immediately issued 4,200 shares of $46 par, 8 percent, cumulative preferred stock and 11,500 shares of $5 par common stock. Its earnings history is as follows: Year 1, net loss of $12,700; Year 2, net income of $64,300; Year 3, net income of $109,100. The corporation did not pay a dividend in year 1

Required
a. How much is the dividend arrearage as of January 1, Year 2?

Dividend arrearage

b. Assume that the board of directors declares a $41,412 cash dividend at the end of Year 2 (remember that the Year 1 and Year 2 preferred dividends are due). How will the dividend be divided between the preferred and common stockholders? (Amounts to be deducted should be indicated with minus sign.)

		Distributed	to shareholders
	amount	preferred	common
Total dividend declared
Year 1 Arrearage
Year 2 Preferred Dividends
Available for common
Distributed to common
Total Distribution

Answer 1

Solution:

a)

Dividend arrearage as of January 1, year 2 =Dividend of year 1

=4,200*46*8%

=$15,456

b)

Dividend for Preferred stockholders = Year 2 dividend + Dividend arrearage as of January 1,year 2

=$15,456+$15,456

=$30,912

Dividend for common stockholders = Total dividend - Dividend for preferred stockhokders

=$41,412 -$30,912

=$10,500

	Amount	Preferred	Common
Total dividend declared	$41,412
Year 1 Arrearage	($15,456)	$15,456	0
Year 2 preferred dividend	($15,456)	$15,456	0
Available for common	$10,500
Distributed to common	($10,500)	0	$10,500
Total distribution		$30,912	$10,500

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