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The company has 20,000 shares of 6%, $45 par preferred stock outstanding. In addition, the company...

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
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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.

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