PROBLEM 10 (8 points) Stockholders\' Equity of Walland Corporation showed the fo

Question

PROBLEM 10 (8 points) Stockholders' Equity of Walland Corporation showed the following in its Stockholders' Equity section of the balance sheet Preferred stock, 9% cumulative, $50 par, 40,000 shares authorized, issued, and outstanding. Common stock, $5 par, 400,000 shares authorized, issued, and outstanding $2,000,000 $2,000,000 Assume that all the stock was issued on January 1 and that no dividends were paid during the first two years of operation. During the third year, Walland paid total cash dividends of $718,000. Compute the amount of cash dividends paid during the third year to both the Preferred shareholders and the Common Stock shareholders

Explanation / Answer

Preference dividend per year = $50 per share * 40,000 shares * 9%

Preference dividend per year = 180,000

Total dividend paid in Year 3 =$718,000

As Preference shared are cumulative in nature so their interest will be cumulated and will be paid in future.

In our case Dividend is not paid for 2 years so their 2 years dividend plus Year 3 dividend all will be paid in 3rd year.

Equity dividend = Total dividend paid – Cumulative interest of preference capital for 2 years – Preference capital current year dividend

= 718,000 – (180,000*2) – 180,000

Equity dividend = 178,000

Preference dividend = 540,000

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