Preferred stock-compute dividend amounts
Preferred stock: Preferred stock usually has a dividend that should be paid out earlier than dividends to common or equity stockholders.
The Preferred dividends would have to be paid for 2015 and 2016 also with current year dividend (2017). Thus, the computation of total dividend paid on the preferred stock is as follows:
Step 1: To calculate Annual dividend;
Step 2: To calculate total dividend paid in the current year; Arrears of dividends for last 2 years is also yet to be paid in the current year, thus the total dividends to be paid is:
Therefore, the total of dividends to be paid in the current year is
Cumulative dividends are one of the preferences given to preferred stockholders. It mandates that any missed dividends to preferred stockholders must be paid before any dividends are paid on common stock.
Company S J did not pay dividends on their preferred stock in 2015 or 2016. Before they can issue a cash dividend in 2017 to their common stockholders, they are required to pay cumulative dividends for 2015, 2016, and 2017.
In order to calculate the annual dividend amount owed to preferred stockholders, multiply the stated dividend rate by the par value per share of the preferred stock by the total number of shares outstanding.
The total amount of dividends paid for 2015, 2016 and 2017 is calculated as the annual dividend amount multiplied by the number of years.
Therefore, the answer is $4,987,500.
Retained earnings are the balance of earnings that are earned by the company over a period of years after paying for dividends. In general, net income earned by the company (after adjusting for interest expense and income tax) is transferred to retained earnings account and thereafter dividends declared and paid are deducted from that amount of retained earnings balance. Retained earnings are part of stockholder's equity.
Retained earnings reflect the cumulative earnings of the company that have been retained for use in the business rather than disbursed to the stockholders as dividends. Virtually the only factors affecting retained earnings are net income or loss reported on the income statement, and dividends. It means the retained earnings will be affected only for the net income or net loss and dividends declared if any. Except these, no other transaction will affect the retained earnings of the company.
In the present case, the only transactions that affect the retained earnings of the company are net loss during the year and dividends declared and paid. Other transactions like decrease in total assets, increase in accounts receivable and proceeds from the issuance of bonds will not affect.
Calculate the retained earnings balance as of December 31, 2016:
Since we have the ending balance of retained earnings for the year 2017, we need to add the net loss for the year 2017 and dividends declared and paid during the year for calculating the opening balance of retained earnings for the year 2017 (Ending balance of December 2016).
The balance of retained earnings as of December 31, 2016 is $603,600.