Question

McNabb Corp. had \(100,000 of 7%, \)20 par value preferred stock, and 12,000 shares of \(25 par value common stock outstanding throughout 2017.

1. Assuming that total dividends declared in 2017 were \)64,000, and that the preferred stock is not cumulative but is fully participating, common stockholders should receive 2017 dividends of what amount?
2. Assuming that total dividends declared in 2017 were \(64,000, and that the preferred stock is fully participating and cumulative with preferred dividends in arrears for 2016, preferred stockholders should receive 2017 dividends totaling what amount?
3. Assuming that total dividends declared in 2017 were \)30,000, that the preferred stock is cumulative, nonparticipating, and was issued on January 1, 2016, and that $5,000 of preferred dividends were declared and paid in 2016, the common stockholders should receive 2017 dividends totaling what amount?

Short answer

While computing for the above illustration total dividend was found as follows:

1. Total Dividend to common stockholder = $48,000
2. Total Dividend to preferred stockholder = $21,250
3. Total Dividend to common stockholder = $21,000

Step-by-step solution

Meaning of Preferred Stock

Common stockholders do not have access to special rights granted to preferred stockholders. If a company is liquidated, preferred stock, for example, will typically pay a higher dividend and have a bigger claim on assets.

Explaining the part (a) of the above question

	Preferred	Common	Total
Current year’s dividend, 7%	$7,000	$21,000*	$28,000
Participating dividend of 9%	$9,000	$27,000	$36,000
Totals	$16,000	$48,000	$64,000

*(Below is the computation of Amounts)

Current years’ dividend Preferred, 7% of $100,000=$ 7,000 Common, 7% of $130,000=$ 21,000	$28,000
The amount available for production ($64,000-$28,000)	$36000
Par value of stock that is to participate ($100,000+$300,000)	$400,000
Rate of participation ($36,000$400,000)	9%

Therefore, Participating Dividend:-

Preferred 9% of $100,000=$9000

Common 9% of 300,000=$27,000

Dividends=$36,000

Determining the stockholder’s dividend in part (b)

	Preferred	Common	Total
Dividend in arrears, 7% of $ 100,000	$7,000		$7,000
Current years Dividend,7%	$7,000	$21,000	$28,000
Participating dividend 7.25% ($29,000 $400,000)*	7,250	21,750	29,000
Totals	$21,250	$42,750	$64,000

*(The same type of schedule as shown in (a) could be used here)

Calculating the total amount of dividend in part (c)

	Preferred	Common	Total
Dividend in arrears($100,000 7%)-$5,000	$ 2,000		$2,000
Current year 7%	$7,000		$7,000
Remainder to common		$21,000	$21,000
Totals	$9,000	$21,000	$30,000