Question

The shareholders' equity of Davis Industries includes the data shown below. During 2019, cash dividends od $22,000 were declared

Common stock

shares authorized 15,000

shares issued&outstanding 12,000

par value $2

Preferred stock 8%

shares authorized 600

shares issued&outstanding 500

par value 100

Determine the amount of dividents payable to prefereed shareholders and to common shareholders under each of the following assumptions regarding the characteristics of the preferred stock

Assumption A - The preferred stock is noncumulative and nonparticipating

Assumption B - The preferred stock is noncumulative, nonparticipating, collable and 3 years in arrears

Assumption C - The preferred stock is cumulative, nonparticipating, and 2 years in arrears

Assumption D - The preferred stock is noncumulative, participating up to and additional 5% and 2 years in arrears

Assumption E - The preferred stock is noncumulative, fully participating and 1 year in arrears

Assumption F - The preferred stock is cumulative, participating up to an additional 10% and 3 years in arrears

assumption

                          Preffered      Common

Arrears

Current

Participating

Total

Answer 1

ANSWER

Preferred stock means the stock or shares that have majorly two priveleges over the common stock holder which are as follows:-

1. Firstly, where any dividend is declared by the organisation, they will be entitled to get first hand on that dividend and then the common stock holders are paid.

2. Secondly, in case the organisation is liquidated, these preferred stock holders would get a priority over the common stock holders when it comes to clearing their dues.

There are many categories under under which an organisation can issue preferred stock as follows:-

1.Cumulative Preferred Stock:-

It means that in case the dividend is not paid in a given year, it will get carried over to the next year and when divedend is paid, then the organisation would pay dividend of the previous year as well.

2. Non Cumulative Preference Stock:-

It means that in case the dividend is not paid in a given year, it will not get carried forward and when the dividend is paid in the next year, then the organisation would pay dividend of that next year only.

3. Partcipating Preferred Stock:-

It means those preferred stock who will get extra dividend in case the amount declared for dividend is left after paying to the common stock holders.

4. Non Partcipating Preferred Stock:-

These preferred stock holders will not get any extra dividend, even if there is some left part after paying to the common stock holders.

Now, calculating the dividend part:-

For Preferred Stock Holders:

500*100*8% = $4,000

For Common Stock Holders:-

22000-4000 = 18000( Provided preferred stock holders are not cumulative)

Assumption A - The preferred stock is noncumulative and nonparticipating

Preffered      Common

Arrears NIL NIL

Current 4000 18000

Participating NIL NIL

Total 4000 18000

Assumption B - The preferred stock is noncumulative, nonparticipating, collable and 3 years in arrears

Preffered      Common

Arrears NIL NIL

Current 4000 18000

Participating NIL NIL

Total 4000 18000

Comment:- It does not make a difference if the preferred stock is non cumulative and in arrears for 3 years.

Assumption C - The preferred stock is cumulative, nonparticipating, and 2 years in arrears

Now the total dividend payable to Preferred stock holders would be 500*100*8% * 3 years(2+1) = 12000

Preffered Common

Arrears 8000(2 years) NIL

Current 4000 10000

Participating NIL NIL

Total 12000 10000

Assumption D - The preferred stock is noncumulative, participating up to and additional 5% and 2 years in arrears

For this part the rate of dividend declared for common stock holders is missing.

Assumption E - The preferred stock is noncumulative, fully participating and 1 year in arrears

Preffered Common

Arrears NIL NIL

Current 4000 18000

Participating NIL NIL

Total 4000 18000

Assumption F - The preferred stock is cumulative, participating up to an additional 10% and 3 years in arrears

For this part the rate of dividend declared for common stock holders is missing.