When Crossett Corporation was organized in January Year 1, itimmediately issued 5,700 shares of...

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Accounting

When Crossett Corporation was organized in January Year 1, itimmediately issued 5,700 shares of $54 par, 5 percent, cumulativepreferred stock and 11,500 shares of $6 par common stock. Itsearnings history is as follows: Year 1, net loss of $12,600; Year2, net income of $61,900; Year 3, net income of $116,400. Thecorporation did not pay a dividend in Year 1.

Required
a. How much is the dividend arrearage as ofJanuary 1, Year 2?

b. Assume that the board of directors declares a$47,780 cash dividend at the end of Year 2 (remember that the Year1 and Year 2 preferred dividends are due). How will the dividend bedivided between the preferred and common stockholders?(Amounts to be deducted should be indicated with minussign.)

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Solution:

Requirement A:

Dividend arrears as of January 1, Year 2 = Arrears of Preferred dividend for 1st year = 5700 Shares *$54 *5% = $ 15,390

Requirement B:

Year 2	Preferred	Common	Total
Total Dividend	$ 30,780	$ 17,000	$ 47,780

Working:

Year 2	Preferred	Common	Total	Calculation
Preferred Dividend Arrears	$ 15,390	$ -	$ 15,390	5700 Shares $54 5%
Preferred Dividend Current Year	$ 15,390	$ -	$ 15,390	5700 Shares $54 5%
Common Dividend Current Year	$ -	$ 17,000	$ 17,000	47780-30780
Total Dividend	$ 30,780	$ 17,000	$ 47,780

Notes:

1) Following is the order of dividend distribution in case of preferred dividend arrears:

a) Previous years preferred stock dividend arrears.

b) Current year preferred stock dividend.

c) Current year common stock dividend.

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Transcribed Image Text

In: AccountingWhen Crossett Corporation was organized in January Year 1, itimmediately issued 5,700 shares of $54...When Crossett Corporation was organized in January Year 1, itimmediately issued 5,700 shares of $54 par, 5 percent, cumulativepreferred stock and 11,500 shares of $6 par common stock. Itsearnings history is as follows: Year 1, net loss of $12,600; Year2, net income of $61,900; Year 3, net income of $116,400. Thecorporation did not pay a dividend in Year 1.Requireda. How much is the dividend arrearage as ofJanuary 1, Year 2? b. Assume that the board of directors declares a$47,780 cash dividend at the end of Year 2 (remember that the Year1 and Year 2 preferred dividends are due). How will the dividend bedivided between the preferred and common stockholders?(Amounts to be deducted should be indicated with minussign.)