E11-7 Computing Dividends on Preferred Shares and Analyzing Differences [LO3, LO4]

The records of Hoffman Company reflected the following balances in the shareholders equity accounts at December 31, 2013:

Common shares, par $13 per share, 25,000 shares outstanding.

Preferred shares, 7 percent, par $10 per share, 5,250 shares outstanding.

Retained earnings, $238,500.

On January 1, 2014, the board of directors was considering the distribution of a $69,000 cash dividend. No dividends were paid during 2012 and 2013.

Required:

Determine the total and per share dividends amounts that would be paid to the common shareholders and to the preferred shareholders under two independent assumptions:

1-a.

The preferred shares are noncumulative. (Round your per share amount to 2 decimal places.)

	Total	Per Share
Paid to preferred shareholders
Paid to common shareholders

1-b.

The preferred shares are cumulative. (Round your per share amount to 2 decimal places.)

	Total	Per Share
Paid to preferred shareholders
Paid to common shareholders

2.

Why were the dividends per common share less for the second assumption?

	The total dividend amount and dividends per share of common shares were less under the second assumption because the dividends in arrears on the preferred shares had to be fulfilled before dividends could be paid for the current year.
	The total dividend amount and dividends per share of common shares were less under the second assumption because the dividend rate for preferred shareholders was increased.

3.	What factors would cause a more favourable dividend for the common shareholders? (Select all that apply.)
	Dividends would be more favorable for the common shareholders if:

	The preferred dividends were not in arrears The total dividend distribution was increased The preferred dividends were not cumluative The preferred dividends were in arrears The total dividend distribution was decreased