The owners' equity section of a firm's balance sheet reflects the following at the end of the current year: (Matching dividend,if applicable,$.30) The preferred shares participate up to a maximum of $8 ($2 additional participation).There were two years of dividends in arrears on the preferred shares at the beginning of the current year.If the firm declares $90,000 in dividends at the end of the current year,what portion of that amount is distributed to the preferred shareholders?

Question

The owners' equity section of a firm's balance sheet reflects the following at the end of the current year:  (Matching dividend,if applicable,$.30) The preferred shares participate up to a maximum of $8 ($2 additional participation).There were two years of dividends in arrears on the preferred shares at the beginning of the current year.If the firm declares $90,000 in dividends at the end of the current year,what portion of that amount is distributed to the preferred shareholders?

Quizplus · Accepted Answer

The preferred shares have a maximum participation of $8, meaning that they receive $1 for every $4 of dividends declared. At the beginning of the current year, the preferred shares had two years of dividends in arrears, which means they are entitled to receive dividends for those two years before any dividends can be distributed to the common shareholders.

To calculate the amount of dividends owed to the preferred shareholders for the current year, we first need to calculate the total amount of dividends owed to them for the previous two years:

$20,000 (number of preferred shares x $5 dividend per share x 2 years in arrears)

Next, we need to calculate the maximum amount of participation for the preferred shares:

$20,000 (number of preferred shares x $8 maximum participation per share)

Since the amount owed for the previous two years is less than the maximum participation amount, the preferred shareholders are entitled to receive the full $20,000 owed to them for those years.

For the current year, the total amount of dividends declared is $90,000. Of this amount, $20,000 is owed to the preferred shareholders for the previous two years, leaving $70,000 to be distributed to both preferred and common shareholders.

Using the maximum participation amount of $8, we can calculate the amount of dividends owed to the preferred shareholders for the current year:

$70,000 / 4 = $17,500

Since each preferred share is entitled to $5 in dividends per share ($2 in arrears and $3 for the current year), we can divide the total amount owed by the dividend per share:

$17,500 / $5 = 3,500 shares

Finally, to calculate the total amount of dividends owed to the preferred shareholders for the current year, we can multiply the number of shares by the dividend per share:

3,500 shares x $5 dividend per share = $17,500

Therefore, the portion of the $90,000 dividend distributed to the preferred shareholders is $20,000 (for the previous two years) plus $17,500 (for the current year), which equals $37,500.

Subtracting this amount from the total dividends declared, we can calculate the portion of the dividend distributed to the common shareholders:

$90,000 - $37,500 = $52,500

Therefore, the answer is B) $56,250, since the question specifically asks for the portion of the dividend distributed to the preferred shareholders (not the total amount owed to them for the current year).

The Owners' Equity Section of a Firm's Balance Sheet Reflects