I need help with my financial accounting practice problems for a test. Here it goes:

Torres Wholesale Merchandise had 20,000 shares of 5%, $20 par value preferred stock and 15,000 shares of $25 par value common stock outstanding throughout 2011. These data apply to each of the independent situations below.

1. Assuming that total dividends declared in 2011 were $25,000 and that the preferred stock is noncumulative, common stockholders should receive total 2011 dividends of ...

2. Assuming that total dividends declared in 2011 were $80,000 and that the preferred stock is cumulative with two years; preferred dividends in arrears on December 31, 2010, the preferred stockholders should receive 2011 dividends totaling...

3. Assuming that total dividends declared in 2011 were $45,000 and that the cumulative preferred stock was issued on January 1, 2010, and that $10,000 of preferred dividends were declared and paid in 2010, the common stockholders should receive 2011 dividends totaling...

Please read the following announcement.

https://www.askmehelpdesk.com/financ...-b-u-font.html

We won't do your homework for you, but we will check your work and guide you so that you understand it.

The terms of the preferred stock will tell you how much the preferred shareholders should get. Why don't you compute that, show your work, and we'll see if you are on the right track.

It's not homework, it's practice problems for my upcoming final.

But here are my computations for what I have so far...

#1:

5% x 20 = 1
1 x 20,000 = 20,000

$25,000 - $20,000 = $5,000 -------> Is this correct?

#2:

80,000 x 2 = 160,000
160,000 + 80,000 = 240,000

#3: I'm clueless...

#1 is correct

When they say they are cumulative, that means that if the company can't pay the $20,000 in any year(s), when the dividends are declared the preferred shareholders get their dividends and back dividends first - before the common shareholders get anything. This also applies to partial dividends. If they receive part of the $20,000, the remaining part is due them prior to the common shareholders getting dividends.

So, for #2, how much do the preferred have coming for the current year and past 2 years.

I'm thinking if you understand #2, #3 may now make sense.

Sorry but the explanation is kind of confusing to me. The current year 2011 and I'm trying to find numbers for 2009 and 2010 as well?

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Originally Posted by k3s0504

Sorry but the explanation is kind of confusing to me. The current year 2011 and I'm trying to find numbers for 2009 and 2010 as well?

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You have computed that the preferred shareholders are to receive $20,000 in dividends per year. Some years the company might not declare dividends. If that is the case, the dividends are in arrears. When dividends are declared, the arrears will be paid. So, if they did not declare dividends in 2009 or 2010, how much is in arrears? Add to that the dividends for the current year ($20,000), and how much in total will go to the preferred shareholders before the common shareholders partake in dividends?

Since $80,000 were paid in dividends in 2011, and $20,000 weren't paid in dividends in both 2009 and 2010, then $40,000 are in arrears? Therefore, they are paid $60,000?

Quote:

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Originally Posted by k3s0504

Since $80,000 were paid in dividends in 2011, and $20,000 weren't paid in dividends in both 2009 and 2010, then $40,000 are in arrears? Therefore, they are paid $60,000??

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Right. The preferred are due $20,000 for 2009 in arrears; $20,000 for 2010 in arrears; and $20,000 for 2011. That leaves $20,000 for the common shareholders.

Do you understand #3 now?

Oops, I meant $120,000

Comment on k3s0504's post

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oops, i meant $120,000

Sounds like some confusion here. Did you understand my last post, agreeing to your original answer? A total of $80,000 were declared. Preferred are entitled to the first $60,000 - leaving $20,000 for the common shareholders.

But for #2, the question states that $80,000 were declared in 2011. So the calculation, 80,000 - 20,000 (2009) - 20,000 (2010) - 20,000 (2011) = 60,000 is correct?

I don't understand where the 20,000 for 2011 came from.

When dividends are declared, dividends in arrears on cumulative preferred stock are paid first. $80,000 was declared in 2011. The order of the payment would be:

$20,000 for dividends in arrears for 2009 for Preferred
$20,000 for dividends in arrears for 2010 for Preferred
$20,000 for dividends for 2011 for Preferred

That totals $60,000. Since $80,000 was declared, that means there is still $20,000 remaining. This is the amount the common shareholders will split.

#3:

$45,000 - $10,000 - $20,000 = $15,000?

Quote:

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Originally Posted by k3s0504

#3:

$45,000 - $10,000 - $20,000 = $15,000?

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Yes, that's right.

Does it all make sense now?

O OK. So therefore, since its cumulative, the preferred stockholders should receive $60,000 in 2011.

Yes it does! Thanks so much!

Right.

When you read these questions, first make sure it's a cumulative preferred stock. Not all of them are. Then, look to see if there are dividends in arrears. The oldest arrears are paid first. Only if money is left over are the current year dividends paid - and then it goes first to the Preferred. Common shareholders only get something if the Preferred are completely satisfied.

So if I have a similar question to number two except that the total dividends declared in 2011 were $35,000, what would change? Since we're only looking for the preferred stockholders' 2011 total dividends. Would it still be $60,000? Or since it's less that $35,000, we do something different?

Are you saying that the following exists:

20,000 shares of 5%, $20 par value cumulative preferred stock
2 years in arrears
$35,000 is declared

Remember arrears are always paid first. Show me what you think the order of payment would be.

I thought that arrears were always $20,000.

Also, we haven't touched the information "15,000 shares of $25 par value common stock outstanding throughout 2011."