E14-2 Knudsen Corporation was organized on January 1, 2016. During its first yea

Question

E14-2 Knudsen Corporation was organized on January 1, 2016. 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:

2016, $5,000; 2017, $12,000; and 2018, $28,000.

Instructions

(a) Show the allocation of dividends to each class of stock, assuming the preferred stock

dividend is 6% and noncumulative.

(b) Show the allocation of dividends to each class of stock, assuming the preferred stock

dividend is 7% and cumulative.

(c) Journalize the declaration of the cash dividend at December 31, 2018, under part (b).

Explanation / Answer

(a)Allocation of dividends to each class of stock, assuming the preferred stock

dividend is 6% and noncumulative

2016

2017

2018

Total Dividend Declaration

$ 5000

$ 12000

$ 28000

Allocation to preferred stock

$ 5000

$ 6000

$ 6000

Allocation to Common stock

Nil

$ 6000

$ 22000

**To Preferred Stock     = 2000 x 50 x 6% = $ 6000   

Since only $ 5,000 in dividends were given, the preferred share holders would get it all, leaving nothing for common shareholders

(b)Allocation of dividends to each class of stock, assuming the preferred stock

dividend is 7% and cumulative.

2016

2017

2018

Total Dividend Declaration

$ 5000

$ 12000

$ 28000

Allocation to preferred stock

$ 5000

$ 9000

$ 7000

Allocation to Common stock

Nil

$ 3000

$ 21000

Due to preferreds each year: 200 x 50 x 7% = $ 7000

If the preferreds are ever "short", carryover the unpaid amount into the next year. Preferreds are "made whole" before any $ is paid to common.

Year 1

Preferreds paid 5000, $ 0 to common

Unpaid on preferred: 7000 – 5000 = 2000

Year 2

Due preferred = 2000 + 7000 = 9000 (preferreds are made whole)

paid preferred: 9000; Remainder to common: 12000 - 9000 = 3000

Year 3

Preferred = 7000

Common: 28000 – 7000 = 21000

(c) Journalize the declaration of the cash dividend at December 31, 2018, under part (b).

Retained Earnings             A/c Dr     $ 28,000

To Dividends Payable   A/c     Cr                          $ 28,000

2016

2017

2018

Total Dividend Declaration

$ 5000

$ 12000

$ 28000

Allocation to preferred stock

$ 5000

$ 6000

$ 6000

Allocation to Common stock

Nil

$ 6000

$ 22000

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