Question

Reinhardt Furniture Company has 40,000 shares of cumulative preferred 2% stock, $150 par and 100,000 shares of $5 par common stock. The following amounts were distributed as dividends: Year 1 $70,000 Year 2 200,000 Year 3 320,000 Determine the dividends per share for preferred and common stock for each year. If an answer is zero, enter '0'. Round all answers to two decimal places.

Answer 1

for year 1

common stock = $1.75 per share

preferred stock = Zero

for year 2

common stock = $4.25 per share

preferred stock = $0.3 per share

for year 3

common stock = $3 per share

preferred stock = $2 per share

Explanation:

step 1

preferred stock value = (40000 shares * $150) = $6000000

common stock value = (100000 shares * $5) = $500000

step 2

For year 1:

Dividend on preferred stock;

`(6000000 * 2)/(100)` = $120000

But total dividend in the question was $70000 therefore total amount of dividend on cumulative preferred stock is $70000.

hence, dividend per share

`= (70000)/(40000 shares)` = $1.75 per share

Dividend on common stock;

70,000 - 70,000 = Zero

as total dividend distributed in year 1 is insufficient for cumulative preferred stock therefore no dividend will be paid on common stock.

For year 2:

Dividend on cumulative preferred stock;

`(6000000 * 2)/(100)`= $120000

extra dividend of year 1 ($120000 - $70000) = $50000

Thus total dividend on cumulative preferred stock

($120000 + $50000) = $170000

So dividend per share

`(170000)/(40000\ shares)`= $4.25 per share

Dividend on common stock;

($200000 – $170000) = $30000

dividend per share

`(30000)/(100000\ shares)` = $0.3 per share

For year 3:

Dividend on cumulative preferred stock;

`(6000000 * 2)/(100)` = $120000

total dividend on cumulative preferred stock $120000

dividend per share

`(120000)/(40000 shares)` = $3 per share

No dividend was extra in the year 2 therefore only available dividend of this year will be paid.

Dividend on common stock;

($320000 – $120000) = $200000

dividend per share

`(200000)/(100000\ shares)`= $2 per share