Question

On December 31, 2015, Alpha Córporation has outstanding 1,000 shares of $100 par value, 7% cumulative and nonparticipating preferred stock, and 20,000 shares of $10 par value common stock. No dividends were paid in 2015. During 2016, Alpha distributed $40,000 in dividends. Use this information to determine for the 2016 the dollar amount of dividends that will be distributed to: 1. Preferred Stock 2. Common Stock

Answer 1

Cumulative Preferred stock are given dividend every year and that too before giving any dividends to the common stock. If in case for any year the company has not paid dividends, then dividend to the preferred stock is said to be in arrears and then the company should pay such arrears of dividend in the upcoming years. In the given case Alpha corporation has not paid any dividends in the year 2015, hence while paying dividend in the year 2016 it should also pay dividend to the preferred stock for the year 2015 which was in arrear and after the rest of the dividend will be distributed to the common stock.

Calculation of dividends :

1. Preferred stock = ( Number of shares * Par value ) * % of preferred stock * Number of years the dividend is to paid = ( 1,000 shares * $100 ) * 7% * 2 years = $14,000

2. Common stock = Total dividend paid - Dividend paid to the preferred stock = $40,000 - $14,000 = $26,000