The records of Hoffman Company reflected the following balances in the stockholders' equity accounts at December 31, 2018: Common stock, par $12 per share, 50,000 shares outstanding. Preferred stock, 8 percent, par $19.5 per share, 7,910 shares outstanding. Retained earnings, $240,000. On January 1, 2019, the board of directors was considering the distribution of a $64,000 cash dividend. No dividends were paid during 2017 and 2018. Required: Determine the total and per-share amounts that would be paid to the common stockholders and to the preferred stockholders under two independent assumptions: The preferred stock is noncumulative. The preferred stock is cumulative. Why were the dividends per share of common stock less for the cumulative preferred stock than the noncumulative preferred stock? What factors would cause a more favorable dividend for the common stockholders?

Question

Wade Dillon

Business

13 February, 10:35

The records of Hoffman Company reflected the following balances in the stockholders' equity accounts at December 31, 2018: Common stock, par $12 per share, 50,000 shares outstanding. Preferred stock, 8 percent, par $19.5 per share, 7,910 shares outstanding. Retained earnings, $240,000. On January 1, 2019, the board of directors was considering the distribution of a $64,000 cash dividend. No dividends were paid during 2017 and 2018. Required: Determine the total and per-share amounts that would be paid to the common stockholders and to the preferred stockholders under two independent assumptions: The preferred stock is noncumulative. The preferred stock is cumulative. Why were the dividends per share of common stock less for the cumulative preferred stock than the noncumulative preferred stock? What factors would cause a more favorable dividend for the common stockholders?

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Answers (1)

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Hezekiah Kelly · Answer 1

a) Total preferred dividend = $37,020; total common stock dividend = $26,980.

b) Total preferred dividend = $12,340; total common stock dividend = $51,660.

C) see explanation section.

Explanation:

Requirement - A

If the preferred dividend is cumulative.

Common stock = $12 x 50,000 = $600,000

Preferred stock = $19.5 x 7,910 = $154,245

Given,

Retained Earnings = $240,000, and Dividend = $64,000.

Generally, cash dividend is distributed to the preferred and common stockholders. However, after paying the preferred stock, dividend is paid to the common stockholders.

Therefore, preferred dividend = $154,245 x 8% = $12,340 for 2019.

As the preferred dividend is cumulative, the preferred stockholders will get the dividend for 2017 and 2018 if there remains any extra dividend after giving for 2019.

For 2017 = $12,340

For 2018 = $12,340

For 2019 = $12,340

Total preferred dividend = $37,020.

Therefore, the total common stock dividend = $ (64,000 - 37,020) = $26,980.

Requirement - B

If the preferred dividend is non-cumulative.

Therefore, preferred dividend = $154,245 x 8% = $12,340 for 2019.

As the preferred dividend is non-cumulative, the preferred stockholders will not get the dividend for 2017 and 2018 despite remaining extra dividend after providing for 2019.

Therefore, preferred dividend = $12,340

Common stock dividend = $ (64,000 - 12,340) = $51,660.

Requirement - C

The common stock dividend is more in non-cumulative as the company does not pay the previous years' dividends to the preferred dividend. On the other hand, if the company pays the dividend for the last years', which is known as cumulative, the dividend will become less. Therefore, the common stockholders will get fewer dividends because of paying the previous years' dividend to the preferred stockholders.

The factors would cause a more favorable dividend for the common stockholders if preferred dividends were non-cumulative, not in arrears, and there is an increase of distribution of dividends.