The outstanding capital stock of Pennington Corporation consists of 2,000 shares

Question

The outstanding capital stock of Pennington Corporation consists of 2,000 shares of $100 par value, 6% preferred, and 5,000 shares of $50 par value common. Assuming that the company has retained earnings of $70,000, 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.

(b) The preferred stock is cumulative and nonparticipating.

(c) The preferred stock is cumulative and participating.

Explanation / Answer

a. Dividend receive by the Preferred Stockholders = 5000 x 50 x 6% = $15,000
Dividend receive by the Common Stockholders = 70000 - 15000 = $55,000

b. Dividend receive by the Preferred Stockholders = 5000 x 50 x 6% x 3 = $45,000
Dividend receive by the Common Stockholders = 70000 - 45000 = $25,000

c. Dividend receive by the Preferred Stockholders = 5000 x 50 x 6% x 3 = $45,000
Dividend receive by the Common Stockholders = 70000 - 45000 = $25,000

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