The records of Hollywood Company reflected the following balances in the stockho

Question

The records of Hollywood Company reflected the following balances in the stockholders’ equity accounts at December 31, 2013: Common stock, par $11 per share, 46,000 shares outstanding Preferred stock, 11 percent, par $9 per share, 6,000 shares outstanding Retained earnings, $217,000 On September 1, 2014, the board of directors was considering the distribution of a $80,000 cash dividend. No dividends were paid during the previous two years. You have been asked to determine dividend amounts under two independent assumptions (show computations): a. The preferred stock is noncumulative. b. The preferred stock is cumulative. Required: 1. Determine the total and per share amounts that would be paid to the common stockholders and to the preferred stockholders under the two independent assumptions. (Round "per share" to 2 decimal places.)

Explanation / Answer

Situation a: Preferred stock are noncumulative I.e. dividend will be paid only for the current year and not for previous two years

Therefore total dividend to preferredstockholders =( 6000 shares * $9 per share ) 11%= $54000 * 11% = $5940

Per share dividend to preferred stockholders = $5940/6000 = $0.99 per share

Remaining balance out of $80000 cash dividend will be paid to common stockholders = $80000-$5940 = $74060

Therefore total dividend to common stockholders = $74060

Per share dividend to common stockholders = $74060/46000 shares = $1.61 per share

Situation b: Preferred stock are cumulative I.e. dividend will be paid for the current year as well as for previous two years

Therefore total dividend to preferredstockholders =( 6000 shares * $9 per share ) 11% * 3= $54000 * 11% * 3 = $5940*3 = $17820

Per share dividend to preferred stockholders = $17820/6000 = $2.97 per share

Remaining balance out of $80000 cash dividend will be paid to common stockholders = $80000-$17820 = $62180

Therefore total dividend to common stockholders = $62180

Per share dividend to common stockholders = $62180/46000 shares = $1.351739 per share

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