Holden Company's shareholders' equity includes 75,000 shares of $0.40 cumulative preferred shares that had been issued for $375,000 and 200,000 common shares issued for a total of $720,000. Holden did not declare any dividends during the prior year and now declares and pays a $108,000 cash dividend. Determine the amount distributed to each class of shareholders.

Question

Holden Company's shareholders' equity includes 75,000 shares of $0.40 cumulative preferred shares that had been issued for $375,000 and 200,000 common shares issued for a total of $720,000. Holden did not declare any dividends during the prior year and now declares and pays a $108,000 cash dividend. Determine the amount distributed to each class of shareholders.

Answer 1

To determine the amount distributed to each class of shareholders, we need to calculate the distribution based on the percentage ownership of each class.

Let's start with the preferred shares:

1. Calculate the total amount invested in preferred shares:
Total investment in preferred shares = Number of preferred shares * Issue price per share
Total investment in preferred shares = 75,000 * $0.40 = $30,000

2. Determine the percentage ownership of preferred shares:
Percentage ownership of preferred shares = Total investment in preferred shares / Total investment in preferred and common shares
Percentage ownership of preferred shares = $30,000 / ($30,000 + $720,000) = 0.0408 or 4.08%

3. Calculate the amount distributed to preferred shareholders:
Amount distributed to preferred shareholders = Percentage ownership of preferred shares * Total cash dividend
Amount distributed to preferred shareholders = 4.08% * $108,000 = $4,406.40 (rounded to the nearest cent)

Now let's move on to the common shares:

1. Calculate the total amount invested in common shares:
Total investment in common shares = Number of common shares * Issue price per share
Total investment in common shares = 200,000 * ($720,000 - $375,000) / $720,000 = $159,722.22

2. Determine the percentage ownership of common shares:
Percentage ownership of common shares = Total investment in common shares / Total investment in preferred and common shares
Percentage ownership of common shares = $159,722.22 / ($30,000 + $720,000) = 0.2083 or 20.83%

3. Calculate the amount distributed to common shareholders:
Amount distributed to common shareholders = Percentage ownership of common shares * Total cash dividend
Amount distributed to common shareholders = 20.83% * $108,000 = $22,499.44 (rounded to the nearest cent)

Therefore, the amount distributed to each class of shareholders is as follows:

- Preferred shareholders: $4,406.40
- Common shareholders: $22,499.44