Question

Dividends on preferred stock. The stockholders' equity section of Lemay Corporation shows the following on December 31, 2015:

Preferred stock—5%, $100 par, 5,000 shares outstanding $ 500,000

Common stock—$10 par, 60,000 shares outstanding 600,000

Paid-in capital in excess of par 200,000

Retained earnings 113,000

Total stockholders' equity $1,413,000

Instructions Assuming that all of the company's retained earnings are to be paid out in dividends on 12/31/15 and that preferred dividends were last paid on 12/31/13.

1. Show how much the preferred and common stockholders should receive if the preferred stock is cumulative and non- participating.

2. Show how much the preferred and common stockholders should receive if the preferred stock is cumulative and fully participating.

3.Show how much the preferred and common stockholders should receive if the preferred stock is cumulative and partially participating up to 2%.

Answer 1

1)Amount of preferred dividend = Par value *dividend rate

                          =500000* 5%

                           = 25000

Total dividend paid in 2015 is equals to retained earning = 113000

In case of cumulative preferred stock ,Any dividend not paid in any year are carried forward to future year and are paid in preference to current year preferred and common stock dividend in that year.

	Preferred	common	total
Dividend in arrears (2014)	25000	0	25000
Current year dividend	25000	63000    [113000-50000 preferred stockholder]	88000
Total dividend	50000	63000	113000

since last dividend was paid in 2013 ,dividend for 2014 was in arrears

2)

In case of fully participating preference shares, After payment of preferred stock dividend and on common shares equivalent to dividend rate on preferred stock ,any excess dividend left are shared by both stockholders in their par value ratios

Total par value = 500000 preferred + 600000 common stock =1100000

	Preferred	common	total
Dividend in arrears (2014)	25000		25000
Current year dividend	25000	600000*5%= 30000	55000
			80000
Participating dividend	15000 [33000*500000/1100000]	18000	33000
Total dividend distributed to each stockholders	65000	48000	113000

**Remaining dividend for participation =113000 -80000 = 33000

3)

	Preferred	common	total
Dividend in arrears (2014)	25000	0	25000
Current year dividend	25000	600000*5%= 30000	55000
			80000
Participating dividend (up to 2% on preferred stock)	10000   [500000*2%]	23000	33000
Total dividend distributed to each stockholders	60000	53000	113000

**Remaining dividend for participation =113000 -80000 = 33000