When Collum Corporation was organized in January 2011, it immediately issued 10,000 shares of $60 par, 5 percent, cumulative preferred stock and 20,000 shares of $10 par common stock. The company's earnings history is as follows: 2011, net loss of $15,000; 2012, net income of $120,000; 2013, net income of $95,000. The corporation did not pay a dividend in 2011.
Required:
(a) How much is the dividend arrearage as of January 1, 2012? (Round your "Dividend per Share" value to 2 decimal places.
(b) Assume that the board of directors declares an $80,000 cash dividend at the end of 2012 (remember that the 2011 and 2012 preferred dividends are due). How will the dividend be divided between the preferred and common stockholders? Show in spreadsheet format
(a) To calculate the dividend arrearage as of January 1, 2012, we first need to determine the preferred dividends for each year.
Preferred dividends are calculated as the number of preferred shares multiplied by the dividend rate. The dividend rate is given as 5% in the problem.
For 2011:
Preferred dividends = 10,000 shares * $60 par value * 5% dividend rate = $30,000
Since no dividend was paid in 2011, the dividend arrearage for 2011 is $30,000.
For 2012:
Preferred dividends = 10,000 shares * $60 par value * 5% dividend rate = $30,000
The dividend arrearage as of January 1, 2012, is the sum of the preferred dividends for 2011 and 2012, which is $30,000 + $30,000 = $60,000.
Therefore, the dividend arrearage as of January 1, 2012, is $60,000.
(b) To determine how the $80,000 cash dividend will be divided between the preferred and common stockholders, we need to consider the dividend payment order.
Preferred stockholders have a cumulative feature, which means any missed dividends must be paid before any dividends can be paid to common stockholders.
In this case, there is a dividend arrearage of $60,000 as of January 1, 2012. Therefore, the preferred stockholders must be paid this amount before any dividends can be paid to common stockholders.
After paying the preferred stockholders their dividend arrearage, the remaining dividend can be allocated between preferred and common stockholders.
Let's assume the remaining dividend is x.
Preferred stockholders will receive the remaining dividend until their cumulative dividend requirement is satisfied. In this case, the cumulative dividend requirement is $60,000. So the preferred stockholders receive x - $60,000.
After paying the preferred stockholders their cumulative dividend, the remaining dividend can be distributed to common stockholders.
To show this in a spreadsheet format:
| | Preferred Stockholders | Common Stockholders |
|-------------------|-----------------------|---------------------|
| Dividend Arrearage| $60,000 | |
| Dividend Payment | $60,000 | |
| Remaining Dividend| | x - $60,000 |
| Total Dividend | $80,000 | |
Therefore, the $80,000 cash dividend will be divided between the preferred and common stockholders such that the preferred stockholders receive their dividend arrearage of $60,000 first, and the remaining dividend can then be distributed between the preferred and common stockholders.