In 20X7, Snowboard Ltd. had the following share capital outstanding: Preferred s
ID: 2572052 • Letter: I
Question
In 20X7, Snowboard Ltd. had the following share capital outstanding: Preferred shares, no par value, S1.20 dividend: authorized- unlimited shares, issued, 100,000 shares $1,250,000 Common shares, no-par value: Authorized- unlimited shares, issued, 480,000 shares S 642,000 No dividends were declared in 20X5 or 20X6, but $1,000,000 dividends were declared in 20X7. Required: Calculate the amount of dividends that would be paid in 20X7 to each share class under the following separate cases: Case A- Preferred shares are cumulative and non participating; Case B- Preferred shares are cumulative and participating with common shares only after the common shares receive a S1 per share dividend. Participation is based on relative contributed capital.Explanation / Answer
Case A
Preferred share are cumulative so the dividends of the previous years have to be given, before dividend for equity share is received.
Dividends for preference shares for years x5,x6,and x7 = 3x 1.2 x 100,000 = $ 360,000
Dividends for Common Shares = rest of the profit after paying preferred shares= 1,000,000 - 360,000 = $640,000
Case B
it is a cumulative preference shares, so the dividends for this class = $360,000
The leftover profit = $ 640,000
this profit will be distributed among common shareholders and preference shareholders only after common shareholders get $1 each . so dividend for common shareholders = $ 1 x 480,000 = $ 480,000
Now the leftover profit = 640,000-480,000 = $ 160,000
160,000 will be distributed among preference and common shareholders in the contributed capital ratio
ratio of dividends for common and preference shares= 642,000/1,250,000
Dividend for common shares = 160,000 x 642/(642+1250) =$ 54,292
Dividend for preference shares = 160,000-54,292 = $105,708
Total Dividend for common shares = 480,000+54,292 = $ 534,292
Total Dividend for preference shares = 360,000 + 105,708 = $ 465,708