Exercise 8-11 Accounting for cumulative preferred dividends LO 8-6 When Higdon C

Question

Exercise 8-11 Accounting for cumulative preferred dividends LO 8-6

When Higdon Corporation was organized in January 2014, it immediately issued 4,200 shares of $50 par, 7 percent, cumulative preferred stock and 11,000 shares of $10 par common stock. The company’s earnings history is as follows: 2014, net loss of $14,100; 2015, net income of $59,300; 2016, net income of $93,000. The corporation did not pay a dividend in 2014.

How much is the dividend arrearage as of January 1, 2015? (Do not round intermediate calculations.)

Assume that the board of directors declares a $40,200 cash dividend at the end of 2015 (remember that the 2014 and 2015 preferred dividends are due). How will the dividend be divided between the preferred and common stockholders? (Do not round intermediate calculations. Amounts to be deducted should be indicated with minus sign.)

When Higdon Corporation was organized in January 2014, it immediately issued 4,200 shares of $50 par, 7 percent, cumulative preferred stock and 11,000 shares of $10 par common stock. The company’s earnings history is as follows: 2014, net loss of $14,100; 2015, net income of $59,300; 2016, net income of $93,000. The corporation did not pay a dividend in 2014.

Explanation / Answer

In case of cumulative preferred stock, any unpaid dividends on preferred stock are carried forward to the future years and must be paid before any dividend is paid to common stockholders.

a) Arrear Dividend as on 1st Jan 2015 is  

Dividend on 7 % Cumulative preferred stock 4,200 x50

=$14700

b)

Preferred Stock (7%) 4,200 shares, $50 par $210,000 at par

Common stock 11,000 shares at $10 par        $110,000 at par

The yearly preferred dividend is calculated as

     $210,000 x 7% = $14,700

Thus, the preferred stockholders would receive up to the first   $14,700 in dividends and common stockholders would receive any dividends beyond $14,700.

The preferred stock may also have a cumulative feature. The cumulative feature would mean that in any year in which the

preferred stockholders did not receive their full dividend

Dividend Paid- Dividend Received

$44100- $40200

$3900 dividend will be divided between preference & Common Stockholders.

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