Question

Nottebart Corporation has outstanding 10,000 shares of \(100 par value, 6% preferred stock and 60,000 shares of \)10 par value common stock. The preferred stock was issued in January 2017, and no dividends were declared in 2017 or 2018. In 2019, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders if the preferred is (a) noncumulative and (b) cumulative?

Short answer

In noncumulative, the preferred stockholder received $60,000,but in cumulative, the preferred shareholder received $180,000.

Step-by-step solution

Meaning of Cumulative Preference Share

All the privileges and benefits of the general membership are included in cumulative preference shares, such as the right to distribute more dividends, preference in dividend payment, and preference in payment over equity shares upon dissolution of the company.

Distribution of Dividend to Common and Preferred Stockholders if the Preferred is

1. Noncumulative

Preferred stockholders would receive $60,000, which is calculated by 6% of the $1,000,000. The remainder distributed to common stockholders is $240,000, which is calculated by deducting the $60,000 from the $300,000.

2. cumulative

Preferred stockholders would receive $180,000, which is calculated by 6% of the $1,000,000.It is then multiplied by 3, and the remainder distributed to the common stockholders is $120,000, which is calculated by deducting the 180,000 from the $300,000.