Question

Waterway Industries was organized on January 1, 2021. During its first year, the corporation issued 2,400 shares of $50 par value preferred stock and 150,000 shares of $10 par value common stock. At December 31, the company declared the following cash dividends: 2021, $5,800; 2022, $13,100; and 2023, $28,800.

Required:
Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 5% and noncumulative.

Answer 1

Preferred dividend is noncumulative which means that it will not accrue if company was unable to pay in any period.

Dividends in 2021

Preferred dividends:

= Number of preferred shares * par value * dividend percentage

= 2,400 * 50 * 5%

= $6,000

Dividends of $5,800 were declared which is not enough to cover even preferred shares so preferred shares will take all the dividends.

Preferred share dividends = $5,800

Common share dividends = $0

Dividends in 2022:

Preferred dividends = $6,000

Common dividends:

= Declared dividends - Preferred dividends

= 13,100 - 6,000

= $7,100

Dividends in 2023:

Preferred dividends = $6,000

Common dividends:

= Declared dividends - Preferred dividends

= 28,800 - 6,000

= $22,800