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Chapter 15: Question 12Q (page 810)

Dagwood Inc. recently noted that its 4% preferred stock and 4% participating preferred stock, which are both cumulative, have priority as to dividends up to 4% of their par value. Its participating preferred stock participates equally with the common stock in any dividends in excess of 4%. What is meant by the term participating? Cumulative?

Short Answer

Expert verified

Dagwood Inc. consists of the fully participating preferred stockin the given situation.

Step by step solution

01

Meaning of Participating

Security holders who do not participate in the income distribution have the right only to receive the stipulated fixed income.

In the case of a partly participating security, it means that the security may also benefit from dividends that the ordinary stock receives up to a specific amount or rate in addition to the fixed dividend payout.

02

Meaning of cumulative

Dividends that are not paid in a given year must be restored in the following year before earnings can be distributed to individual investors.

Anarrears dividend represents any dividends that have not been paid on cumulative preferred shares. Dividend arrears are not a burden unless the board of directors declares them.

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Most popular questions from this chapter

Where in the financial statements is preferred stock normally reported?

Hatch Company has two classes of capital stock outstanding: 8%, \(20 par preferred and \)5 par common. At December 31, 2017, the following accounts were included in stockholders鈥� equity.

Preferred Stock, 150,000 shares \( 3,000,000

Common Stock, 2,000,000 shares 10,000,000

Paid-in Capital in Excess of Par鈥擯referred Stock 200,000

Paid-in Capital in Excess of Par鈥擟ommon Stock 27,000,000

Retained Earnings 4,500,000

The following transactions affected stockholders鈥� equity during 2018.

Jan.1 30,000 shares of preferred stock issued at \)22 per share.

Feb.1 50,000 shares of common stock issued at \(20 per share.

June 1 2-for-1 stock split (par value reduced to \)2.50).

July 1 30,000 shares of common treasury stock purchased at \(10 per

share. Hatch uses the cost method.

Sept.15 10,000 shares of treasury stock reissued at \)11 per share.

Dec.31 The preferred dividend is declared, and a common dividend of 50垄

per share is declared.

Dec. 31 Net income is $2,100,000.

Instructions

Prepare the stockholders鈥� equity section for Hatch Company at December 31, 2018. Show all supporting computations.

Cole Inc. owns shares of Marlin Corporation stock. At December 31, 2017, the securities were carried in Cole鈥檚 accounting records at their cost of \(875,000, which equals their fair value. On September 21, 2018, when the fair value of the securities was \)1,200,000, Cole declared a property dividend whereby the Marlin securities are to be distributed on October 23, 2018, to stockholders of record on October 8, 2018. Prepare all journal entries necessary on those three dates.

In the absence of restrictive provisions, what are the basic rights of stockholders of a corporation?

Stock splits and stock dividends may be used by a corporation to change the number of shares of its stock outstanding.

  1. What is meant by a stock split effected in the form of a dividend?
  2. From an accounting viewpoint, explain how the stock split effected in the form of a dividend differs from an ordinary stock dividend.
  3. How should a stock dividend that has been declared but not yet issued be classified in a balance sheet? Why?
See all solutions

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