Question

Curtain Co. paid dividends of $4,000; $7,500; and $8,900 during Year 1, Year 2, and Year 3, respectively. The company had 1,100 shares of 5.5%, $100 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

Answer 1

Answer:

$600

Explanation:

Dividend distributed to preferred share is based on the predetermined rate associated with these share. When the dividend is declared preferred share dividend is paid first. The remainder is distributed between the common stockholders.

Value of Preferred share = 1,100 shares x $100 par value = $110,000

Preferred Dividend = $110,000 x 6% = $6,600

Accrued dividend in first year = $6,600 - $4,000 = $2,600

Accrued dividend in second year = $6,600 + $2,600 - $7,500 = $1,700

Accrued dividend in third year = $6,600 + $1,700 - $8,900 = -$600

Excessive dividend after payment to preferred stockholders will be available for the common stock holders.

Dividend Available for Common stockholders = $600