AI Corporation issued 100,000 shares of $20 par value, cumulative, 8% preferred stock on January 1, 2009, for $2,100,000. In December 2011, AI declared its first dividend of $500,000.


If the preferred stock is not cumulative, how much of the $500,000 would be paid to common stockholders?

If the preferred stock is cumulative, how much of the $500,000 would be paid to common stockholders?

If the preferred stock is not cumulative, how much of the $500,000 would be paid to common stockholders?

1) 8% on $2,000,000 = $160,000

2) The common stockholders would get 500,000 less 160,000 = $340,000.

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If the preferred stock is cumulative, how much of the $500,000 would be paid to common stockholders?

1) 8% on $2,000,000 = $160,000

2) The common stockholders would get 500,000 less 3 (160,000 )= $20,000.

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Thank you so much!! :)

pieks21,

You are most welcome!

Rolcam.

I will disagree with the second part of the answer. If the preferred is cumulative, based on the fact pattern there would be two years of preferred due, so they would get $320,000 and the common $180,000.

I agree with the first part of the answer.

Hodag,

December 2009
December 2010
December 2011

These make it 3 years NOT 2 years.

Hodag, I think you probably made what is a very common error I see on this type of thing. Which is starting at 09, then counting "10 is 1 year, then 11 is 2 years." You know, where you're counting years on your fingers.

The problem with that is that it works find if you're at 12/31/09 cause then 12/31/10 is one year. But not when you're starting at 1/1/09, because you have to count all of 09 as well.

Same deal with counting months and I see this all the time.

How would you journalize the original entry of the issuance of the preferred stock?

Here is the matrix for the Journal Entries to recognize issuance of stock:

Cash Dr- (total of Preferred cost added to Common cost)
Preferred Stock Cr- [ # Shares x Cost ($) of Par ]
Common Stock Cr- [ # Shares x Cost ($) of Par ]
"Issued preferred stock and common
stock at par for cash."

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Preferred Stock: (# shares) x ( Par Value of shares in $) = Cost, Preferred

Common Stock: (# shares) x ( Par Value of shares in $) = Cost, Common