Question

The records of Hollywood Company reflected the following balances in the stockholdersâ equity accounts at the end of the current year:
Common stock, $12 par value, 50,000 shares outstanding
Preferred stock, 10 percent, $10 par value, 5,000 shares outstanding
Retained earnings, $216,000

On September 1 of the current year, the board of directors was considering the distribution of an $85,000 cash dividend. No dividends were paid during the previous two years. You have been asked to determine dividend amounts under two independent assumptions (show computations):

a. The preferred stock is noncumulative.
b. The preferred stock is cumulative.

Required:
1. Determine the total and per share amounts that would be paid to the common stockholders and the preferred stockholders under the two independent assumptions.
2. Will the statement of cash flows be affected differently under the two independent assumptions?

Answer 1

Answer:

1-a. We have:

Total dividend for noncumulative preferred stock = $5,000

Dividend per share for noncumulative preferred stock = $1.00 per share

Total dividend for common stock = $80,000

Dividend per share for common stock = $1.60 per share

1-b. We have:

Total dividend for cumulative preferred stock = $15,000

Dividend per share for noncumulative preferred stock = $3.00 per share

Total dividend for common stock = $70,000

Dividend per share for common stock = $1.40 per share

2. No, the statement of cash flows will NOT be affected differently under the two independent assumptions.

Explanation:

1. Determine the total and per share amounts that would be paid to the common stockholders and the preferred stockholders under the two independent assumptions.

1-a. The preferred stock is noncumulative.

Noncumulative preferred stock is a type of preferred stock that does not entitle holders to any dividends that are missed.

Therefore, we have:

Total dividend for noncumulative preferred stock = Dividend percentage * Par value * Number of noncumulative preferred shares outstanding = 10% * $10 * 5,000 = $5,000

Dividend per share for noncumulative preferred stock = Total dividend for noncumulative preferred stock / Number of noncumulative preferred shares outstanding = $5,000 / 5,000 = $1.00 per share

Total dividend for common stock = Amount to distribute - Total dividend for noncumulative preferred stock = $85,000 - $5,000 = $80,000

Dividend per share for common stock = Total dividend for common stock / Number of common shares outstanding = $80,000 / 50,000 = $1.60 per share

1-b. The preferred stock is cumulative.

Cumulative preferred stock refers to a type of preferred stock that entitles the holder to dividends that have been missed before common stockholders are paid.

Therefore, we have:

Total dividend for cumulative preferred stock = (Dividend percentage * Par value * Number of noncumulative preferred shares outstanding) * (1 + Number of years missed) = (10% * $10 * 5,000) * (1 + 2) = $15,000

Dividend per share for noncumulative preferred stock = Total dividend for noncumulative preferred stock / Number of noncumulative preferred shares outstanding = $15,000 / 5,000 = $3.00 per share

Total dividend for common stock = Amount to distribute - Total dividend for noncumulative preferred stock = $85,000 - $15,000 = $70,000

Dividend per share for common stock = Total dividend for common stock / Number of common shares outstanding = $70,000 / 50,000 = $1.40 per share

2. Will the statement of cash flows be affected differently under the two independent assumptions?

No, the statement of cash flows will NOT be affected differently under the two independent assumptions. This is because the total amount of cash that will be paid as dividend under the two independent assumptions will still remain the same at $85,000.