Erik Corporation has 2,500 shares of 9%, $110 par value preferred stock outstand

Question

Erik Corporation has 2,500 shares of 9%, $110 par value preferred stock outstanding at December 31, 2012. At December 31, 2012, the company declared a $143,700 cash dividend. Determine the dividend paid to preferred stockholders and common stockholders under each of the following scenarios. 1. The preferred stock is noncumulative, and the company has not missed any dividends in previous years. The dividend paid to preferred stockholders $ The dividend paid to common stockholders $ 2. The preferred stock is noncumulative, and the company did not pay a dividend in each of the two previous years. The dividend paid to preferred stockholders $ The dividend paid to common stockholders $ 3. The preferred stock is cumulative, and the company did not pay a dividend in each of the two previous years. The dividend paid to preferred stockholders $ The dividend paid to common stockholders $

Explanation / Answer

1. The preferred stock is noncumulative, and the company has not missed any dividends in previous years. 2,500 shares of 9%, $110 par value preferred stock outstanding means preferred dividend = 2,500 shares x 9% x $110 = $24,750 Common dividend = $143,700 - $24,750 = $118,950 2.The preferred stock is noncumulative, and the company did not pay a dividend in each of the two previous years. Since the stock is noncumulative, there's no difference between this and no. 1 above. 3. The preferred stock is cumulative, and the company did not pay a dividend in each of the two previous years. Since the stock is cumulative, the company must make good the preferred dividend for the two previous yrs, i.e. $24,750 x 2 = $49,500 , before it can pay this year's preferrred dividend of $24,750, and then if there's any left over, the common stockholders will be paid, so: Two previous years arrears $49,500 Current year's preferred $24750 -------------------------------------------- Total preferred dividend $74,250 Common dividend = $143,700- $74,250= $69,450 Preferred Stockholders 1. $24,750 2. $24,750 3. $74,250 Common stockholders 1. $118,950 2. $118,950 3. $69,450

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