Question

(Preferred Stock Dividends) Cajun Company has outstanding 2,500 shares of \(100 par, 6% preferred stock and 15,000 shares of \)10 par value common. The following schedule shows the amount of dividends paid out over the last 4 years.

Instructions

Allocate the dividends to each type of stock under assumptions (a) and (b). Express your answers in per share amounts using the format shown below

Assumptions
	(a) Preferred, noncumulative And nonparticipating	(b) Preferred, cumulative, and fully participating
Year	Paid-out	Preferred	Common	Preferred	Common
2012	\(13,000
2013	\)26,000
2014	\(57,000
2015	\)76,000

Short answer

The common and preferred per share was greater in 2015 in both situations when the Preferred is noncumulative and nonparticipating and also when preferred is cumulative, and fully participating.

Step-by-step solution

Meaning of Preferred Stock Dividend

Preferred dividends are dividends paying out to the holders of the company's preferred stock from the company's profits, and preferred stockholders have priority over common stockholders in receiving such dividends, which means that the company must first discharge any subscription obligations for preferred dividends before the company can pay any dividend obligations to preferred stockholders.

Allocating the dividend to each type of stock

Assumptions
		(a) Preferred, noncumulative And nonparticipating			(b) Preferred, cumulative, and fully participating
Year	Paid-out	Preferred	Common	Preferred	Common
2012	$13,000	$5.20	0	$5.20	0
2013	$26,000	$6.00	$0.73	$6.80	$0.60
2014	$57,000	$6.00	$2.80	$14.25	$1.43
2015	$76,000	$6.00	$4.07	$19.00	$1.90

The computation for Preferred noncumulative and nonparticipating (a)

2012
Dividends paid	$13,000
Amount due to preferred	$15,000
Preferred per share		$5.20
Common per share		0

Working Notes:

Calculation of Preferred per Share

$\begin{array}{rcl}\mathrm{Preferred}\mathrm{per}\mathrm{share}& =& \mathrm{Shares}\times \mathrm{Par}\mathrm{value}\times \mathrm{rate}\mathrm{of}\mathrm{preferred}\mathrm{stock}\\ & =& 2,500\times \$100\times 6\%\\ & =& \$15,000\end{array}$

Calculation of Common per Share

$\begin{array}{rcl}CommonShares& =& \frac{Common}{Shares}\\ & =& \frac{\$13,000}{\$2,500}\\ & =& \$5.20\end{array}$

2013
Dividends paid	$26,000
Amount due to preferred	$15,000
Amount due to common	$11,000
Preferred per share		$6.00
Common per share		$0.73

Working Notes:-

Computation of Preferred per Share

$\begin{array}{rcl}\mathrm{Preferred}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Preferred}}{\mathrm{Shares}}\\ & =& \frac{\$15,000}{\$2,500}\\ & =& \$6.00\end{array}$

Computation of Common per Share

$\begin{array}{rcl}\mathrm{Common}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Common}}{\mathrm{Shares}}\\ & =& \frac{\$11,000}{\$15,000}\\ & =& \$0.73\end{array}$

2014
Dividends paid	$57,000
Amount due to preferred	$15,000
Amount due to common	$42,000
Preferred per share		$6.00
Common per share		$2.80

Working Notes:-

Computation of Preferred per share

localid="1648445816681" $\begin{array}{rcl}\mathrm{Preferred}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Preferred}}{\mathrm{Shares}}\\ & =& \frac{\$15,000}{\$2,500}\\ & =& \$6.00\end{array}$

Computation of Common per Share

localid="1648445846812" $\begin{array}{rcl}\mathrm{Common}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Common}}{\mathrm{Shares}}\\ & =& \frac{\$42,000}{\$15,000}\\ & =& \$2.80\end{array}$

2015
Dividends paid	$76,000
Amount due to preferred	$15,000
Amount due to common	$61,000
Preferred per share		$6.00
Common per share		$4.07

Working Notes:-

Computation of Preferred per share

$\begin{array}{rcl}\mathrm{Preferred}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Preferred}}{\mathrm{Shares}}\\ & =& \frac{\$15,000}{\$2,500}\\ & =& \$6.00\end{array}$

Computation of Common per Share

$\begin{array}{rcl}\mathrm{Common}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Common}}{\mathrm{Shares}}\\ & =& \frac{\$61,000}{\$15,000}\\ & =& \$4.07\end{array}$

The computation for Preferred cumulative and fully participating (b)

2012
Dividends paid	$13,000
Amount due to preferred	$15,000
Preferred per share		$5.20
Common per share		0

Working Notes:-

Computation of Amount due to preferred

$\begin{array}{rcl}\mathrm{Amount}\mathrm{due}\mathrm{to}\mathrm{preferred}& =& \mathrm{Shares}\times \mathrm{Par}\mathrm{value}\times \mathrm{Preferred}\mathrm{rate}\\ & =& 2,500\times \$100\times 6\%\\ & =& \$15,000\end{array}$

Computation of preferred per Share

$\begin{array}{rcl}\mathrm{Preferred}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Preferred}}{\mathrm{Share}}\\ & =& \frac{\$13,000}{2,500}\\ & =& \$5.20\end{array}$

2013
Dividends paid	$26,000
Amount due to preferred In arrears Current	2,000 15,000 $17,000
Amount due to common	$11,000
Preferred per share		$6.00
Common per share		$0.60

Working Notes:-

Computation of Preferred per Share

$\begin{array}{rcl}\mathrm{Preferred}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Preferred}}{\mathrm{Shares}}\\ & =& \frac{\$15,000}{\$2,500}\\ & =& \$6.00\end{array}$

Computation of Common per Share

$\begin{array}{rcl}\mathrm{Common}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Common}}{\mathrm{Shares}}\\ & =& \frac{\$9,000}{\$15,000}\\ & =& \$0.60\end{array}$

2014
Dividends paid	$57,000
Amount due to preferred Current	$15,000
Amount due to common Current	$9,000
The amount available for participation $(57,000-15,000-9,000)$		$33,000
Par value of stock that is to participate $(\$250,000+\$150,000)$		$400,000
Rate of participation		8.25%
Participating dividend Preferred Common		$20,625 $12,375
Common per share		$0.60
Total amount per share-Preferred Current $15,000 Participation 20,625 $35,625 Total amount per share $(35,625÷2,500)$		$14.25
Total amount per share - Common Current $9,000 Participation 12,375 $21,375 Total amount per share $(21,375÷15,000)$		$1.43

Working Notes:-

Computation of amount due to preferred

$\begin{array}{rcl}\mathrm{Amount}\mathrm{due}\mathrm{to}\mathrm{preferred}& =& \mathrm{Shares}\times \mathrm{Par}\mathrm{value}\times \mathrm{Preferred}\mathrm{rate}\\ & =& 2,500\times \$100\times 6\%\\ & =& \$15,000\end{array}$

Computation of amount due to common

localid="1648446793286" $\begin{array}{rcl}\mathrm{Amount}\mathrm{due}\mathrm{to}\mathrm{common}& =& \mathrm{Shares}\times \mathrm{Par}\mathrm{value}\times \mathrm{Preferred}\mathrm{rate}\\ & =& 1,500\times \$100\times 6\%\\ & =& \$9,000\end{array}$

Computation of Rate of Participation

$\begin{array}{rcl}\mathrm{Rate}\mathrm{of}\mathrm{participation}& =& \frac{\mathrm{Par}\mathrm{value}\mathrm{of}\mathrm{stock}}{\mathrm{Amount}\mathrm{available}\mathrm{for}\mathrm{participation}}\\ & =& \frac{400,000}{33,000}\\ & =& 8.25\%\end{array}$

Calculation of Participating dividend-Preferred

$\begin{array}{rcl}\mathrm{Participating}\mathrm{dividend}& =& \mathrm{Rate}\mathrm{of}\mathrm{participation}\times \mathrm{Preferred}\\ & =& 8.25\%\times \$250,000\\ & =& \$20,625\end{array}$

Calculation of Participating dividend-Common

$\begin{array}{rcl}\mathrm{Participating}\mathrm{dividend}& =& \mathrm{Rate}\mathrm{of}\mathrm{participation}\times common\\ & =& 8.25\%\times \$150,000\\ & =& \$12,375\end{array}$

Calculation of amount Common per share

$\begin{array}{rcl}\mathrm{Common}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Common}\mathrm{amount}}{\mathrm{Preferred}\mathrm{amount}}\\ & =& \frac{15,000}{9,000}\\ & =& 0.60\end{array}$

Computation of Total Amount per Share – Preferred

localid="1648447631028" $\begin{array}{rcl}\mathrm{Total}\mathrm{amount}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Current}+\mathrm{Participation}\mathrm{amount}}{\mathrm{Share}}\\ & =& \frac{\$15,000+\$20,625}{2,500}\\ & =& \$14.25\\ & & \end{array}$

Computation of Total Amount per Share – Common

$\begin{array}{rcl}\mathrm{Total}\mathrm{amount}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Current}+\mathrm{Participation}\mathrm{amount}}{\mathrm{Share}}\\ & =& \frac{\$9,000+\$12,375}{1,500}\\ & =& \$1.43\end{array}$

2015
Dividends paid	$76,000
Amount due to preferred Current	$15,000
Amount due to common Current	$9,000
The amount available for participation ($76,000+15,000+9,000$)		$52,000
Par value of stock that is to participate $(250,000+150,000)$		$400,000
Rate of participation		13%
Participating dividend Preferred Common		$32,500 $19,500
Total amount per share-Preferred Current $15,000 Participation 32,500 $47,500 Total amount per share		$19.00
Total amount per share - Common Current $9,000 Participation 19,500 $28,500 Total amount per share		$1.90

Computation of amount due to preferred

$\begin{array}{rcl}\mathrm{Amount}\mathrm{due}\mathrm{to}\mathrm{preferred}& =& \mathrm{Shares}\times \mathrm{Par}\mathrm{value}\times \mathrm{Preferred}\mathrm{rate}\\ & =& 2,500\times \$100\times 6\%\\ & =& \$15,000\end{array}$

Computation of amount due to common

$\begin{array}{rcl}\mathrm{Amount}\mathrm{due}\mathrm{to}\mathrm{common}& =& \mathrm{Shares}\times \mathrm{Par}\mathrm{value}\times \mathrm{Preferred}\mathrm{rate}\\ & =& 1,500\times \$100\times 6\%\\ & =& \$9,000\end{array}$

Computation of Rate of Participation

$\begin{array}{rcl}\mathrm{Rate}\mathrm{of}\mathrm{participation}& =& \frac{\mathrm{Par}\mathrm{value}\mathrm{of}\mathrm{stock}}{\mathrm{Amount}\mathrm{available}\mathrm{for}\mathrm{participation}}\\ & =& \frac{400,000}{52,000}\\ & =& 13\%\end{array}$

Calculation of Participating dividend-Preferred

$\begin{array}{rcl}\mathrm{Participating}\mathrm{dividend}& =& \mathrm{Rate}\mathrm{of}\mathrm{participation}\times \mathrm{Preferred}\\ & =& 13\%\times \$250,000\\ & =& \$32,500\end{array}$

Calculation of Participating dividend-Common

$\begin{array}{rcl}\mathrm{Participating}\mathrm{dividend}& =& \mathrm{Rate}\mathrm{of}\mathrm{participation}\times \mathrm{Preferred}\\ & =& 13\%\times \$150,000\\ & =& \$19,500\end{array}$

Computation of Total Amount per Share – Preferred

$\begin{array}{rcl}\mathrm{Total}\mathrm{amount}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Current}+\mathrm{Participation}\mathrm{amount}}{\mathrm{Share}}\\ & =& \frac{\$15,000+\$32,500}{2,500}\\ & =& \$19.00\end{array}$

Computation of Total Amount per Share – Common

$\begin{array}{rcl}\mathrm{Total}\mathrm{amount}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Current}+\mathrm{Participation}\mathrm{amount}}{\mathrm{Share}}\\ & =& \frac{\$19,000+\$19,500}{1,500}\\ & =& \$1.90\end{array}$