Accounting for cash dividends (Learning Objective 4) 10–15 min.

Zepher, Inc., prepared the following stockholders’ equity section as of December 31, 2014.

Paid-in Capital:

Preferred Stock, 5%, $80 par, 6,000 shares authorized, 1,000 shares issued and outstanding Common Stock, $10 par, 25,000 shares authorized, 9,000 shares issued and outstanding Paid-in Capital in Excess of Par—Common Total Paid-in Capital Retained Earnings Total Stockholders’ Equity

$ 80,000 90,000 85,000

$255,000 145,000

$400,000 Stockholders’ Equity Answer the following questions about Zepher, Inc.’s dividends:

1. How much in dividends must Zepher, Inc., declare each year before the common stockholders get any cash dividends for the year?

2. Suppose Zepher, Inc., declares cash dividends of $22,000 for 2014. How much of the dividends goes to preferred? How much goes to common?

3. Is Zepher, Inc.’s preferred stock cumulative or noncumulative? How can you tell?

4. Suppose Zepher, Inc., passed the preferred dividend in 2015 and 2016. In 2017, the company declares cash dividends of $19,000. How much of the dividends goes to preferred? How much goes to common?

AppendixLO1