When Higdon Corporation was organized in January 2014, it immediately issued 5,4

Question

When Higdon Corporation was organized in January 2014, it immediately issued 5,400 shares of $52 par, 7 percent, cumulative preferred stock and 9,000 shares of $8 par common stock. The company’s earnings history is as follows: 2014, net loss of $16,000; 2015, net income of $64,200; 2016, net income of $98,700. The corporation did not pay a dividend in 2014.

a. How much is the dividend arrearage as of January 1, 2015? (Do not round intermediate calculations.)

b. Assume that the board of directors declares a $43,200 cash dividend at the end of 2015 (remember that the 2014 and 2015 preferred dividends are due). How will the dividend be divided between the preferred and common stockholders? (Do not round intermediate calculations. Amounts to be deducted should be indicated with minus sign.)

Explanation / Answer

a.The dividend arrearage as of January 1 2015 = 5,400 x 52 x 7% = $19,656 only, in respect of preferred stock

b. Of the $43,200 cash dividend declared, (19,656 x 2) =$ 39,312 would be dividends on cumulative preferred stock, and the remaining $ 3,888 will be dividends payable to common stockholders.

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