accounting problems

Question

Seventy-Two Inc., a developer of radiology equipment, has stock outstanding as follows: 80,000 shares of cumulative preferred 3% stock, $20 par and 405,000 shares of $25 par common.

During its first four years of operations, the following amounts were distributed as dividends: first year, $34,000; second year, $75,000; third year, $100,000; fourth year, $110,000.

Determine the dividends per share on each class of stock for each of the four years. Round all answers to two decimal places. If no dividends are paid in a given year, enter "0.00".

Answer 1

To determine the dividends per share for each class of stock for each of the four years, we first need to calculate the total dividends that would be allocated to the preferred stock based on its cumulative feature and the dividend rate. Then, any remaining dividends can be distributed to the common stock.

First, let's calculate the dividends required for the preferred stock each year:

The preferred stock is cumulative, which means that preferred dividends must be paid for the current year and any unpaid dividends from previous years before any dividends can be paid to common stockholders.

Each preferred share is entitled to a 3% dividend on its $20 par value: 3% of $20 = $0.60 per share per year.

There are 80,000 shares of preferred stock, so the total annual dividend for all preferred shares would be: 80,000 shares * $0.60 = $48,000.

Now, let's go through each year:

First Year: $34,000 Distributed as Dividends

Preferred stock: Total needed is $48,000.

All $34,000 is paid to preferred stockholders ($0.425 per share), but this is less than the $48,000 required by $14,000.

No dividends paid to common stockholders.

Second Year: $75,000 Distributed as Dividends

Preferred stock: Total needed is $48,000, plus the $14,000 shortfall from the first year, equals $62,000.

All $62,000 is paid to preferred stockholders to cover last year's shortfall as well as this year's required dividend (fully paid at $0.775 per share).

Remaining $75,000 - $62,000 = $13,000 paid to common stockholders.

There are 405,000 common shares, so common dividends per share = $0.0321 ($13,000 / 405,000 shares).

Third Year: $100,000 Distributed as Dividends

Preferred stock: Total needed is $48,000.

All $48,000 paid to preferred stockholders (fully paid at $0.60 per share).

Remaining $100,000 - $48,000 = $52,000 paid to common stockholders.

Common dividends per share = $0.1284 ($52,000 / 405,000 shares).

Fourth Year: $110,000 Distributed as Dividends

Preferred stock: Total needed is $48,000.

All $48,000 paid to preferred stockholders (fully paid at $0.60 per share).

Remaining $110,000 - $48,000 = $62,000 paid to common stockholders.

Common dividends per share = $0.1531 ($62,000 / 405,000 shares).

Let's summarize the dividends per share for preferred and common stock across the four years:

Year 1: Preferred $0.425, Common $0.00

Year 2: Preferred $0.775, Common $0.0321

Year 3: Preferred $0.60, Common $0.1284

Year 4: Preferred $0.60, Common $0.1531