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The outstanding share capital of Marginal Utility Corporation consists of 6,000 preferred shares with a book...

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Accounting

The outstanding share capital of Marginal Utility Corporationconsists of 6,000 preferred shares with a book value of $420,000and 22,000 common shares with a book value of $220,000. Thepreferred shares carry a dividend of $6 per share and have a $70stated value.

Required:

Assuming that the company has retained earnings of$340,000 that is to be entirely paid out in dividends and thatpreferred dividends were not paid during the two years precedingthe current year, state how much each class of shares shouldreceive under each of the following conditions:

  1. The preferred shares are non-cumulative andnon-participating.
  2. The preferred shares are cumulative andnon-participating.
  3. The preferred shares are cumulative andparticipating.

Answer & Explanation Solved by verified expert
4.1 Ratings (483 Votes)

1) The preferred shares are non-cumulative and non-participating.
Preferred Dividend = 6000 shares x $6 per share $    36,000.00
Common Dividend = $340,000 - 36000 $ 3,04,000.00
2) The preferred shares are cumulative and non-participating.
Preferred Dividend = 6000 shares x $6 per share x 3 years $ 1,08,000.00
Common Dividend = $340,000 - $108,000 $ 2,32,000.00
3)The preferred shares are cumulative and participating.
Preferred Dividend = $108000 + $65,625 $ 1,73,625.00
Common Dividend = (22000 x $6) + $34,375 $ 1,66,375.00
Par value of shares that are to participate
Preferred Shares = 6000 x $70 $ 4,20,000.00
Common Shares $ 2,20,000.00
Total Shares $ 6,40,000.00
Additional amount available for participation = ($340,000 - 108000 -(22000 x $6) $ 1,00,000.00
participating amount
Preferred = 100000 X $420,000/$640,000 $    65,625.00
Common = 100000 x 220,000/$640,000 $    34,375.00

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