Question

The Frank Company has issued 10%, fully participating, cumulative preferred stock with a total par value of $300,000 and common stock with a total par value of $900,000. Dividends for one previous year are in arrears. How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $222,000 are distributed at the end of the current year?

Answer 1

$78000 to Preferred stockholder and $144000 to common stockholder.

Step-by-step explanation:

Given: Current common stock outstanding = $900000.

Current preferred stock outstanding=$300000.

Total Cash dividend to be distributed= $222000.

Dividend to be distributed at 10%.

As we know, preferred shareholder are given preference over common stockholder for dividend payment. Company has to pay dividend in arrear next year if they miss out paying dividend to preferrence shareholder in any particualr year.

First, lets compute the annual dividend of preferred stockholder.

As given, Dividends for one previous year are in arrears and dividend is issued at 10%.

∴ Preferrence stock dividend=
`\$ 300000* 10\%`

Preferrence stock dividend=
`\$ 300000* (10)/(100) = \$ 30000`

∴ Preferrence stckholder´s:

current year dividend to be paid is $30000

Arrear to be paid of previous year is $30000

Now, compute dividend to be paid to common stockholder.

Dividend to be paid to common stockholder=
`\$900000* 10\%`

∴ Common stockholder´ dividend=
`\$ 900000* (10)/(100) = \$ 90000`

As given, Total shareholder dividend to be paid is $222000 and it is fully participative and cumulative.

∴ Balance of total dividend=
`\$222000-(\$60000+\$90000)= \$2220000-\$150000`

Balance of total dividend=
`\$ 72000`

Next, distributing the balance of total dividend on pro rata basis.

Preferred stock=
`(3)/(12) * \$72000= \$ 18000`

Common stock=
`(9)/(12) * 72000=\$ 54000`

Finally, computing total dividend paid current year

Preferred stock=
`\$30000+\$30000+\$18000= \$78000`

Common stock=
`\$90000+\$54000= \$144000`

∴ $78000 to Preferred stockholder

$144000 to common stockholder