Exercise 15-21 The outstanding capital stock of Cullumber Corporation consists o

Question

Exercise 15-21

The outstanding capital stock of Cullumber Corporation consists of 2,100 shares of $100 par value, 8% preferred, and 4,800 shares of $50 par value common.

Assuming that the company has retained earnings of $88,500, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.

(a) The preferred stock is noncumulative and nonparticipating. (Round answers to 0 decimal places, e.g. $38,487.)

Preferred Common (b) The preferred stock is cumulative and nonparticipating. (Round answers to o decimal places, e.g. $38,487.) Preferred Common (c) The preferred stock is cumulative and participating. (Round the rate of participation to 4 decimal places, e.g Preferred Common incon

Explanation / Answer

(a)

Preferred stock dividends = 2,100 shares * $100 par value * 8% = $16,800

As the preferred stock is noncumulative, dividends which are not paid out during the 2 years preceding the current year do not accumulate and need not be paid in the current year. As the preferred stock is nonparticipating, preferred stock holders do not participate in the excess dividends.

(b)

Preferred stock dividends = $16,800 + ($16,800*2) = $50,400

As the preferred stock is cumulative, dividends which are not paid out during the 2 years preceding the current year accumulate and need to be paid in the current year. As the preferred stock is nonparticipating, preferred stock holders do not participate in the excess dividends.

(c)

Preferred stock dividends = $16,800 + ($16,800*2) = $50,400

Common stock dividends = 4,800 shares * $50 par value * 8% = $19,200

As the preferred stock is cumulative, dividends which are not paid out during the 2 years preceding the current year accumulate and need to be paid in the current year. As the preferred stock is participating, preferred stock holders participate in the excess profits.

Excess dividends = $88,500 - $50,400 - $19,200 = $18,900

Proration of excess dividends :

Preferred stock = $18,900*$210,000/$450,000 = $8,820

Common stock = $18,900*$240,000/$450,000 = $10,080

Preferred Common $16,800 $71,700 ($88,500-$16,800)

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