Matt Schmidt Company’s ledger shows the following balances on December 31, 2014.
ID: 2460704 • Letter: M
Question
Matt Schmidt Company’s ledger shows the following balances on December 31, 2014. 4% Preferred Stock—$10 par value, outstanding 20,200 shares $ 202,000 Common Stock—$100 par value, outstanding 30,890 shares 3,089,000 Retained Earnings 638,900 Assuming that the directors decide to declare total dividends in the amount of $372,700, determine how much each class of stock should receive under each of the conditions stated below. One year‘s dividends are in arrears on the preferred stock. (a) The preferred stock is cumulative and fully participating. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to 0 decimal places, e.g. $38,487.) Preferred Common $Entry field with incorrect answer 16160 $Entry field with incorrect answer (b) The preferred stock is noncumulative and nonparticipating. (Round answers to 0 decimal places, e.g. $38,487.) Preferred Common $Entry field with correct answer 8080 $Entry field with correct answer 364620 (c) The preferred stock is noncumulative and is participating in distributions in excess of a 6% dividend rate on the common stock. (Round the rate of participation to 4 decimal places, e.g.1.4278%. Round answers to 0 decimal places, e.g. $38,487.) Preferred Common $ $
Explanation / Answer
Answer: a)
Annual dividend of preferred stock = 202,000*0.04 = $8080
Last year dividend is in arrears, so this year total dividend payable to preferred stockholders is:
8080*2 = $16160
Remaining dividend = 372,700-16160 = 356540
Total number of shares = 30,890 (equity) + 20,200 (preferred) = 51090
Participation rate per share = 356540/51090 = 6.9786
Total dividend to preferred stockholders = (6.9786*20200 ) + 16160 = 157128
Total dividend to common stockholders = 6.9786*30,890 = 215569
Answer: c)
Annual preference dividend = 8080
Remaining dividend = 372,700-8080 = 364620
6% dividend to common stockholders = 30,890*0.06 = 1853
Remaining dividend = 364620-1853 = 362767
Participation rate per share = 362767/51090 = 7.1005
Preferred dividend = (7.1005*20200)+8080 = 151510
Equity dividend = (7.1005*30890) + 1853 = 221187