Stockholders’ equity of Ernst Company consists of 85,000 shares of $5 par value, 11% cumulative preferred stock and 305,000 shares of $1 par value common stock. Both classes of stock have been outstanding since the company’s inception. Ernst did not declare any dividends in the prior year, but it now declares and pays a $150,000 cash dividend at the current year-end.Determine the amount distributed to each class of stockholders for this two-year-old company.
Question
Stockholders’ equity of Ernst Company consists of 85,000 shares of 1 par value common stock. Both classes of stock have been outstanding since the company’s inception. Ernst did not declare any dividends in the prior year, but it now declares and pays a $150,000 cash dividend at the current year-end.Determine the amount distributed to each class of stockholders for this two-year-old company.
Solution
To determine the amount distributed to each class of stockholders, we first need to calculate the dividends for the preferred stock and then the remaining for the common stock.
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Calculate Preferred Stock Dividends: The preferred stock has a cumulative feature, which means that if any year's dividends are not paid, they accumulate and must be paid in the future before any dividends can be paid to common stockholders. The preferred stock is 11% cumulative, so the annual dividend per share is 0.55. Since there are 85,000 shares of preferred stock, the total annual preferred dividends are 46,750. Since Ernst did not declare any dividends in the prior year, the accumulated dividends for the preferred stock are 93,500.
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Calculate Common Stock Dividends: After paying the preferred dividends, the remaining amount can be distributed to the common stockholders. The total dividends declared are 150,000 - 56,500.
So, the amount distributed to the preferred stockholders is 56,500.
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