Question

Kirchner Company has 50,000 shares of $10 par value, 6% preferred stock and 300,000 shares of $1 par value common stock outstanding. As of December 31, 2018, it had $900,000 of Retained earnings.

On December 31, 2019, the Board of Directors is considering the distribution of a cash dividend to the common and preferred stockholders. No dividends were declared in 2017 and 2018 and no dividends were in arrears prior to 2017. The company is considering the following options.

Option 1

The preferred stock is noncumulative and the dividend for 2019 would be $75,000.

Option 2

The preferred stock is cumulative, and the dividend would be $75,000.

Option 3

The preferred stock is cumulative, and the dividend would be $120,000.

Required:

1. For each scenario, determine the dollar amount of dividends that would be paid to a) preferred stockholders and b) common stockholders.
2. Define the following as they pertain to dividend distribution:
   1. Date of declaration
   2. Date of record
   3. Date of payment

Answer 1

Kirchner company

Option 1

Preferred dividend = 50000 * 10 * 6 % = $ 30000

Common dividend = 75000 - 30000 = $ 45000

Option 2

Preferred dividend = 50000 * 10 * 6 % =$ 30000 * 3 years = $ 90000 but limited to $ 75000.

Common dividend = $ 0

Option 3

Preferred dividend = 50000 * 10 * 6 % =$ 30000 * 3 years = $ 90000

Common dividend = $ `120000 - 90000 = $ 30000

a) Date of declaration is the date when the board declares that it will distribute dividend.

b) Date of record is the date taken to calculate the number of shareholders holding the shares of the company as on date.

c) Date of payment is the date on which actual payment takes place.