The shareholders’ equity of Kramer Industries includes the data shown below. Dur

Question

The shareholders’ equity of Kramer Industries includes the data shown below. During 2019, cash dividends of $140 million were declared. Dividends were not declared in 2017 or 2018. ($ in millions) Common stock $ 300 Paid-in capital—excess of par, common 900 Preferred stock, 12%, nonparticipating 150 Paid-in capital—excess of par, preferred 315 Required: Determine the amount of dividends payable to preferred shareholders and to common shareholders under each of the following two assumptions regarding the characteristics of the preferred stock. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Assumption A — The preferred stock is noncumulative. Assumption B — The preferred stock is cumulative.

Explanation / Answer

The PS is noncumlative :-

The dividend to be paid to preference shareholders = 150,000,000 * 12 % = $ 18 million

Remainder will go to common shareholders = 140 - 18 = $ 122 million

The PS is cumlative :-

The dividend to be paid to preference shareholders = 150,000,000 * 12 % = $ 18 million * 3 years = $ 54 million

Remainder will go to common shareholders = 140 - 54 = $ 86 million

When the preference shares are cumulative , then first of all , preferrence dividend in arrears are paid ,then current year preferrence dividend is paid and at last the balance goes to  common shareholders.

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