Question

Exercise 10-4B Determine the amount of preferred stock dividends (LO10-3) A company has 1,200 shares of 7 % , $100 par value preferred stock the company issued at the beginning of Year 1. All remaining shares are common stock. The company was not able to pay dividends in Year 1, but plans to pay dividends of $18,000 in Year 2 Required: 1. & 2. How much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in Year 2, assuming the preferred stock is cumulative? What if the preferred stock were noncumulative? Non Cumulative Cumulative Preferred dividends in arrears for Year 1 Preferred dividends for Year 2 Remaining dividends to common stockholders Total dividends

Answer 1

Preferred dividend = 1,200 shares *$100 * 7% = $8,400

Non cumulative dividend will not be carry forward in case of non payment in earlier year. Only cumulative dividend will be transferred and its a liability in hands of company.

	Cumulative	Non-Cumulative
Preferred dividend in arrears Year 1	$8,400	-
Preferred dividend Year 2	$8,400	$8,400
Remaining Dividends to common stockholders	$1,200	$9,600
Total Dividends	$18,000	$18,000