Question - For 2016, Stark Corporation has outstanding common stock (5,000 shares), preferred cumulative stock entitled (under the corporate charter) to dividends at the rate of $6/share before the payment of any dividend on any other class, and convertible preferred stock entitled to cumulative dividends at the rate of $2/sh. During the year, Stark made distributions on the preferred stock in the total amount of $6/share (1,000 shares) and on the cumulative convertible preferred stock in the total amount of $2/share (500 shares). The total amount distributed during 2016 on all three classes of stock was $12,000. At the end of 2016 before consideration of dividends paid during the year, Stark had $6,000 of accumulated E&P and $3,000 of current E&P.
a. How should E&P be allocated to the distributions assuming that the common stock received a total dividend of $5,000 ($1/share) on March 1, preferred cumulative stock received its dividend on February 1 and the convertible preferred received its dividend on November 1?
b. Do you believe that the fact that the preferred cumulative stock is required, by charter, to its dividend before the payment of any dividend to any other class makes any difference when allocating E&P? Explain your reasoning.