Question

The shareholders’ equity of Kramer Industries includes the data shown below. During 2019, cash dividends of $220 million were declared. Dividends were not declared in 2017 or 2018.

	($ in millions)
Common stock	$	260
Paid-in capital—excess of par, common		1,040
Preferred stock, 10%, nonparticipating		130
Paid-in capital—excess of par, preferred		390

Required:
Determine the amount of dividends payable to preferred shareholders and to common shareholders under each of the following two assumptions regarding the characteristics of the preferred stock. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Assumption A — The preferred stock is noncumulative.
Assumption B — The preferred stock is cumulative.

Answer 1

• Assumption A

>preferred stock are non cumulative.
>This means that any unpaid dividend of prior years is lost and will not be paid.
>Current dividend = $ 220 million

Answer:
>Dividend payable to Preferred shareholders = $ 130 millions par value x 10% = $ 13 million
>Dividend payable to common shareholders = $ 220 - $ 13 = $ 207 millions

• Assumption B

>preferred stock are cumulative.
>This means that any unpaid dividend of prior years is NOT lost , and will get accumulated and paid when there are sufficient dividend declared.
>Dividend in arrear for 2 years = ($130 million x 10%) x 2 = $ 26 millions
>Current dividend = $ 220 million

Answer:
>Dividend payable to Preferred shareholders = $ 26 million for arrear + $ 13 million for 2019 = $ 39 millions
>Dividend payable to common shareholders = $ 220 - $ 39 = $ 181 millions