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Chapter 15: Question 12Q (page 810)

Dagwood Inc. recently noted that its 4% preferred stock and 4% participating preferred stock, which are both cumulative, have priority as to dividends up to 4% of their par value. Its participating preferred stock participates equally with the common stock in any dividends in excess of 4%. What is meant by the term participating? Cumulative?

Short Answer

Expert verified

Dagwood Inc. consists of the fully participating preferred stockin the given situation.

Step by step solution

01

Meaning of Participating

Security holders who do not participate in the income distribution have the right only to receive the stipulated fixed income.

In the case of a partly participating security, it means that the security may also benefit from dividends that the ordinary stock receives up to a specific amount or rate in addition to the fixed dividend payout.

02

Meaning of cumulative

Dividends that are not paid in a given year must be restored in the following year before earnings can be distributed to individual investors.

Anarrears dividend represents any dividends that have not been paid on cumulative preferred shares. Dividend arrears are not a burden unless the board of directors declares them.

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Most popular questions from this chapter

Dividends are sometimes said to have been paid “out of retained earnings.” What is the error, if any, in that statement?

(Recording the Issuances of Common Stock) During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock.

Jan. 10 Issued 80,000 shares for cash at \(6 per share.

Mar. 1 Issued 5,000 shares to attorneys in payment of a bill for

\)35,000 for services rendered in helping the company to

incorporate.

July 1 Issued 30,000 shares for cash at \(8 per share.

Sept. 1 Issued 60,000 shares for cash at \)10 per share.

Instructions

  1. Prepare the journal entries for these transactions, assuming that the common stock has a par value of \(5 per share.
  2. Prepare the journal entries for these transactions, assuming that the common stock is no-par with a stated value of \)3 per share.

(Computation of Book Value per Share) Morgan Sondgeroth Inc. began operations in January 2015 and reported the following results for each of its 3 years of operations.

2015 \(260,000net loss 2016 \)40,000 net loss 2017 \(800,000 net income

At December 31, 2017, Morgan Sondgeroth Inc. capital accounts were as follows.

8% cumulative preferred stock, par value \)100;

authorized, issued, and outstanding 5,000 shares \(500,000

Common stock, par value \)1.00; authorized 1,000,000 shares;

issued and outstanding 750,000 shares \(750,000

Morgan Sondgeroth Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Sondgeroth began operations. The state law permits dividends only from retained earnings.

Instructions

  1. Compute the book value of the common stock on December 31, 2017.
  2. Compute the book value of the common stock on December 31, 2017, assuming that the preferred stock has a liquidating value of \)106 per share.

For what reasons might a corporation purchase its own stock?

For what reasons might a company restrict a portion of its retained earnings?
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