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Chapter 15: Question 15BE (page 811)

Nottebart Corporation has outstanding 10,000 shares of \(100 par value, 6% preferred stock and 60,000 shares of \)10 par value common stock. The preferred stock was issued in January 2017, and no dividends were declared in 2017 or 2018. In 2019, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders if the preferred is (a) noncumulative and (b) cumulative?

Short Answer

Expert verified

In noncumulative, the preferred stockholder received $60,000,but in cumulative, the preferred shareholder received $180,000.

Step by step solution

01

Meaning of Cumulative Preference Share

All the privileges and benefits of the general membership are included in cumulative preference shares, such as the right to distribute more dividends, preference in dividend payment, and preference in payment over equity shares upon dissolution of the company.

02

Distribution of Dividend to Common and Preferred Stockholders if the Preferred is

1. Noncumulative

Preferred stockholders would receive $60,000, which is calculated by 6% of the $1,000,000. The remainder distributed to common stockholders is $240,000, which is calculated by deducting the $60,000 from the $300,000.

2. cumulative

Preferred stockholders would receive $180,000, which is calculated by 6% of the $1,000,000.It is then multiplied by 3, and the remainder distributed to the common stockholders is $120,000, which is calculated by deducting the 180,000 from the $300,000.

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Most popular questions from this chapter

Woolford Inc. declared a cash dividend of $1.00 per share on its 2 million outstanding shares. The dividend was declared on August 1, payable on September 9 to all stockholders of record on August 15. Prepare all journal entries necessary on those three dates.

(Preferred Dividends) Matt Schmidt Company鈥檚 ledger shows the following balances on December 31, 2017.

7% Preferred stock鈥擻(10 par value, outstanding 20,000 shares \) 200,000

Common stock鈥擻(100 par value, outstanding 30,000 shares 3,000,000

Retained earnings 630,000

Instructions

Assuming that the directors decide to declare total dividends in the amount of \)366,000, determine how much each class of stock should receive under each of the conditions stated below. One year鈥檚 dividends are in arrears on the preferred stock.

  1. The preferred stock is cumulative and fully participating.
  2. The preferred stock is noncumulative and nonparticipating.
  3. The preferred stock is noncumulative and is participating in distributions in excess of a 10% dividend rate on the common stock.

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?

Explain how underwriting costs and accounting and legal fees associated with the issuance of stock should be recorded.

Under IFRS, the amount of capital received in excess of par value would be credited to:

(a) Retained Earnings.

(b) Contributed Capital.

(c) Share Premium.

(d) Par value is not used under IFRS
See all solutions

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