Question

The company has 20,000 shares of 6%, $45 par preferred stock outstanding. In addition, the company has 100,000 shares of common stock outstanding. The company started business on January 1 of Year 1. Total cash dividends paid during Year 1 and Year 2 were $45,000 and $100,000, respectively. Compute the total dividends paid to common shareholders in both years assuming that the preferred stock is cumulative.

		A. Year 1 = $0; Year 2 = $25,000
		B. Year 1 = $45,000; Year 2 = $63,000
		C. Year 1 = $0; Year 2 = $37,000
		D. Year 1 = $0; Year 2 = $46,000
		E. Year 1 = $6,000; Year 2 = $54,000

Answer 1

Answer:

Determinatin of dividend paid to common shareholders:

Particulars	Year -1
Cash dividend paid during the year	$45,000
Less"Dividend paid to cumulative preferred stock (20,0000 x $45 x 6%) i.e. $54,000 limited to the extent of $45,000 as only $45,000 dividend paid during the year.	($45,000)
Dividend paid to common shareholders	$0

Particulars	Year -2
Cash dividend paid during the year	$100,000
Dividend paid to cumulative preferred stock (20,0000 x $45 x 6%) + $9,000) as dividend is cumulative in nature.	($63,000)
Dividend paid to common shareholders	$37,000

Accordingly, Option (C) i.e Year 1 = $0; Year 2 = $37,000 is the correct answer.