Easy Automotive Manufacturers (EAM) has two classes of stock: common stock with a par value of $2

Question:

Easy Automotive Manufacturers (EAM) has two classes of stock: with a of $2 (500,000 shares authorized; 300,000 shares outstanding) and preferred stock with a of $100 (25,000 shares authorized; 10,000 shares outstanding). The preferred stock has an annual stated rate of $5 per share. EAM declared the following dividends over a ﬁve-year period, during which no additional shares of stock are issued.
Year Amount
2005................................................... $170,000
2006................................................... 0
2007................................................... 110,000
2008................................................... 30,000
2009................................................... 200,000
Required:
(a) What is the total dollar amount of cash to which preferred stockholders are entitled to in one year?
(b) Assume that EAM’s preferred stock is non cumulative. Determine the amount of dividends for preferred and common shareholders in each of the ﬁve years.
(c) Assume that EAM’s preferred stock is cumulative.
(1) Determine the amount of dividends for preferred and common shareholders in each of the ﬁve years.
(2) Explain how dividends in arrears, if they exist, should be noted in the ﬁnancial statements.
(3) At the end of 2006, EAM’s management does not want to list the dividends in arrears in the ﬁnancial statements as required because there is no legal liability to pay that amount as of December 31, 2006. Is EAM’s management right about there being no legal obligation? Explain. Discuss why this omission might mislead investors.
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