Exercise 14-2 Knudsen Corporation was organized on January 1, 2016. During its f
ID: 2490464 • Letter: E
Question
Exercise 14-2 Knudsen Corporation was organized on January 1, 2016. During its first year, the corporation issued 1,900 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: 2016, $6,150; 2017, $13,600; and 2018, $27,500.
Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 7% and noncumulative.
Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and cumulative.
Explanation / Answer
Answer to Part A : Allocation of dividends to each class of stock, assuming the preferred stock dividend is 7% and noncumulative.
Value of Preferred Stock = $ 95,000
Year 2016 :
Dividend on Preferred Stock = 7% on $ 95,000 = $ 6,650
In Year 2016, the whole of the dividend declared will be paid to Preferred Stock, as the dividend to Preferred stockholder will be paid first and leaving nothing for Common Stockholder.
Year 2017 :
Dividend on Preferred Stock = 7% on $ 95,000 = $ 6,650
In Year 2017, an amount of $ 6,650 will be paid to Preferred stockholder and balance of $ 6,950 of the dividend declared will be paid to Common Stockholder.
Year 2018 :
Dividend on Preferred Stock = 7% on $ 95,000 = $ 6,650
In Year 2018, an amount of $ 6,650 will be paid to Preferred stockholder and balance of $ 20,850 of the dividend declared will be paid to Common Stockholder.
Answer to PArt B : allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and cumulative
Value of Preferred Stock = $ 95,000
Year 2016 :
Dividend on Preferred Stock = 7% on $ 95,000 = $ 6,650
In Year 2016, the whole of the dividend declared will be paid to Preferred Stock, as the dividend to Preferred stockholder will be paid first and an amount of $ 500 will be in arrear and will be paid to Preferred Stockholder next year and leaving nothing for Common Stockholder.
Year 2017 :
Dividend on Preferred Stock = 7% on $ 95,000 = $ 6,650
In Year 2017, an amount of $ 6,650 will be paid to Preferred stockholder, as annual dividend and an amount of $ 500 will also be paid for the amount which was in arrear for 2016 and balance of $ 6,450 of the dividend declared will be paid to Common Stockholder.
Year 2018 :
Dividend on Preferred Stock = 7% on $ 95,000 = $ 6,650
In Year 2018, an amount of $ 6,650 will be paid to Preferred stockholder and balance of $ 20,850 of the dividend declared will be paid to Common Stockholder.
Answer for Journal Entry :
Retained Earning Dr 27,500
To Dividend Payable 27,500
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