Question

Analyzing Cash Dividends on Preferred and Common Stock Potter Company has outstanding 15,000 shares of $50 par value, 8% preferred stock and 50,000 shares of $5 par value common stock. During its first three years in business, it declared and paid no cash dividends in the first year, $280,000 in the second year, and $60,000 in the third year. (a) If the preferred stock is cumulative, determine the total amount of cash dividends paid to each class of stock in each of the three years. (b) If the preferred stock is noncumulative, determine the total amount of cash dividends paid to each class of stock in each of the three years.

Answer 1

Answer:

year 1

P =    0

CS = 0

year 2

P =    120,000

CS = 160,000

year 3

P =    60,000

CS = 0

Total

P = 180,000

CS = 160,000

Explanation:

preferred stock

15,000 shares x $50 each = 750,000

dividends 750,000 x 8% = 60,000 per year (cumulative)

when the dividends are cumulatives, it means the unpaid portion is carried over the period until payment.

first year 0 dividends accumulated 60,000

second year                       280,000  dividends

firs year preferred                 (60,000)

second year preferred          (60,000)

available for common stock 160,000

third year                     60,000 dividends

preferred dividends    (60,000)

available for CS                     0

total for preferred stock 60,000 x 3 = 180,000

total for cs 160,000 at year 2