The outstanding capital stock of York Brands Corporation consists of 10,000 shar

Question

The outstanding capital stock of York Brands Corporation consists of 10,000 shares of $75 par value, 10% preferred, and 25,000 shares of $1 par value common. Instructions Assuming that the company has net income of $250,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the current year or the past year, state how much each class of stock should receive under each of the following conditions. (a) The preferred stock is cumulative and nonparticipating. (b) The preferred stock is cumulative and fully participating.

Explanation / Answer

a) When The preferred stock is cumulative and nonparticipating

if a preferred stock is designated as cumulative, its holders must receive any past dividends that had been omitted on the preferred stock and its current year dividend, before common stockholders are paid any dividends.

Dividend to be paid to preference share holders for two years(current year+past year) =$ 5000,(25000*10%*2)

Balance amonut of 245,000 is to be paid to equity shareholders.

B.The preferred stock is cumulative and fully participating.

Dividend to be paid to preference share holders for two years(current year+past year)  =$ 5000.

Dividend to be paid to equity shareholders (10000*75*10%) =$ 75,000

Balance amount to be apportined among preference and equity share holdres based on their participation ratio

To preference share holders (25000/775000*170000) =$ 5484

  To equity share holders =$ 164516(170000-5484)

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