Griseta Corporation was organized on January 1, 2011. During its first year, the
ID: 2365589 • Letter: G
Question
Griseta Corporation was organized on January 1, 2011. During its first year, the corporation issued 2,000 shares of $50 par value preferred stock, and 100,000 shares of $10 par value common stock. At December 31, the company declared the following cash dividends: 2011, $6,000; 2012, $12,000; and 2013, $28,000. Instructions: A. Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 7% and not cumulative. B. Shwo the allocation of dividends to each class of stock, assmuing the preferred stock dividend is 8% and cumulative. C. Journalize the declaration of the cash dividend at December 31, 2013, under part (b).Explanation / Answer
Preferred shareholders receive dividends before common share holders. 2,000 x 50 x 7% = $7,000 annual preferred dividends 2011, $6,000; Since only $6,000 in dividends were given, the preferred share holders would get it all, leaving nothing for common shareholders. 2012, $12,000; Preferred would get $7,000 Common would get $5,000 2013, $28,000. Preferred would get $7,000 Common would get $21,000 The difference between cumulative and non-cumulative, is that cumulative preferred stock accumulates any dividends in arrears (owed) until they are finally paid. For instance, in the example you're given. 2,000 x 50 x 7% = $7,000 annual preferred dividends 2011, $6,000; Since only $6,000 in dividends were given, the preferred share holders would get it all, leaving nothing for common shareholders. There would also be $1,000 in dividends in arrears (owed). That would be carried over to the next year. 2012, $12,000; Not only would preferred shareholders get the $7,000 for this year, they would also receive the $1,000 in dividends in arrears from the previous year, for a total of $8,000. Common shareholders would receive $4,000. 2013, $28,000. With no dividends in arrears, at this point, preferred would get $7,000 Common would get $21,000
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