Question

Brazee Company has the following paid-in capital:

Preferred stock, 6%, $5 par value, 100,000 shares authorized, 40,000 shares issued and outstanding	$2,000,000
Common stock, $9 par value, 300,000 shares authorized, 220,000 shares issued and outstanding	$1,980,000

If the company pays a $70,000 dividend, and the preferred stock is cumulative and two years' dividends are in arrears, what is the amount the common stockholders will receive?

Multiple Choice:

A) $34,000

B) $46,000

C) $58,000

D) $70,000

Answer 1

Ans is Option A $ 34000

Preference shares, more commonly referred to as preferred stock, are shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued

In the case of cumulative preferred shares, the issuing company has to accumulate Preference dividend & pay dividends first to preferred shareholders in the event dividends were not paid for previous years and the balance will be paid to common Stockholder

As the given preference Share is Cumulative and already 2 years dividend are in Arrear plus current year Divident , hence 3 year divident is to be paid

Dividend Payable to prefernce holder= $200000*6%*3year= $36000

Balance Available to Commom Stockholder = Total Dividend Paid - Payable to Preference Stockholder

=$70000-$36000

=$34000