How does cumulative preferred stock differ from non-cumulative preferred stock?
The owners must receive all dividends in arrears in cumulative preferred stock before the company pays dividends to the common stockholders.
For non-cumulative preferred stock, the company isn't expected to pay any dividends in arrears.
Preferred shares, also known as preferred stock, are shares of a company's stock that have dividends paid to preferred stockholders before the issuance of dividends on common stock.
Cumulative demonstrates a class of preferred stock that qualifies an investor for dividends in arrears.
For instance, an organization issues cumulative preferred stock with a par value of $20,000 and an annual payment rate of 5%. A downfall occurs in the economy; the company can only afford to pay half the dividend and owes the cumulative preferred shareholder $500.
The next year, the economy is even worse, and the organization can pay no dividend at all; it then owes the shareholder $1,500.
Noncumulative depicts a type of preferred stock that does not qualify investors to procure any dividends in arrears. From the above example, if the organization fails to pay the dividend of $1,000, it is not expected to pay the arrears in the next year.
It is only required to pay the dividend for that year.
Computing earnings per share and price/earnings ratio
Rocket Corp. earned net income of $153,040 and paid the minimum dividend to preferred stockholders for 2018. Assume that there are no changes in common shares outstanding during 2018. Rocket’s books include the following figures:
Preferred Stock—6%, $60 par value; 2,000 shares authorized, 1,000
shares issued and outstanding $ 60,000
Common Stock—$5 par value; 80,000 shares authorized, 48,000 shares
issued, 46,700 shares outstanding 240,000
Paid-In Capital in Excess of Par—Common 470,000
Treasury Stock—Common; 1,300 shares at cost (26,000)
2. Assume Rocket’s market price of a share of common stock is $12 per share. Compute Rocket’s price/earnings ratio.
Question: Identifying sources of equity, stock issuance, and dividends
Tillman Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:
Preferred Stock—5%, ? Par Value; 625,000 shares
authorized, 325,000 shares issued and outstanding
Paid-In Capital in Excess of Par—Common 2,600,000
Total Paid-In Capital 5,250,000
Retained Earnings 11,800,000
Total Stockholders’ Equity $ 17,050,000
Common Stock—$1 Par Value; 7,000,000 shares
authorized, 1,350,000 shares issued and outstanding
3. Make two summary journal entries to record issuance of all the Tillman Comfort Specialists stock for cash. Explanations are not required.
Question: Journalizing a large stock dividend
Nelly, Inc. had 320,000 shares of $2 par value common stock issued and outstanding as of December 15, 2018. The company is authorized to issue 1,300,000 common shares. On December 15, 2018, Nelly declared a 40% stock dividend when the market value for Nelly’s common stock was $7 per share. The stock was issued on Dec. 30.
1. Journalize the declaration and distribution of the stock dividend.
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