Analyzing Cash Dividends on Preferred and Common Stock Potter Company has outsta

Question

Analyzing Cash Dividends on Preferred and Common Stock Potter Company has outstanding 15,000 shares of $50 par value, 8% preferred stock and 50,000 shares of $5 par value common stock. During its first three years in business, it declared and paid no cash dividends in the first year, $280,000 in the second year, and $60,000 in the third year. (a) If the preferred stock is cumulative, determine the total amount of cash dividends paid to each class of stock in each of the three years. (b) If the preferred stock is noncumulative, determine the total amount of cash dividends paid to each class of stock in each of the three years.

Explanation / Answer

Potter Company All Amounts in $ (1) If the preference shares are cumulative in nature Year 1 Year 2 Year 3 Cash Dividends declared 0 280000 60000 Preferred Stock Dividends @ 8% on 15,000 shares of $ 50 value 0 120000 60000 Year 2 is cumulative for year 1 and 2 combined Common Stock Dividends 0 160000 0 (2) If the preference shares are non-cumulative in nature Year 1 Year 2 Year 3 Cash Dividends declared 0 280000 60000 Preferred Stock Dividends @ 8% on 15,000 shares of $ 50 value 0 60000 60000 Common Stock Dividends 0 220000 0

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