Question

Mozart & Company paid cash dividends totaling $160,000 in 2016 and $80,000 in 2017. In 2018, the company will pay cash dividends of $825,000. There were no dividends in arrears as of January 1, 2016. There are 25,000 shares of common stock outstanding and 100,000 shares of 6 percent, $50 par cumulative preferred stock outstanding. What is the amount of cash dividends payable to common stockholders in 2018? O A. $360,000 OB. $165,000 O c. $825,000 OD. $140,000

Answer 1

Answer)

Calculation of amount of dividend payable to common stockholders in 2018

Dividend paid to common stockholders = Total amount available to be paid as dividend – Dividend payable to preferred stock in 2018

                                                                         = $ 825,000 - $ 660,000

                                                                       = $ 165,000

Therefore the amount of dividend payable to common stockholders in 2018 will be $ 165,000 and the correct option in the given question is (B).

Working Note:

Calculation of Arrears of dividend on preferred as on January 1, 2018 that is pertinent to the year 2016 and 2017

Dividend on preferred stock in arrears = (Number of shares of preferred stock X Par value per share X rate of dividend on preferred stock X number of years) – Dividend paid in the year 2016 – Dividend paid in the year 2017

                                                    = (100,000 X $ 50 per share X 6% X 2 years) - $ 160,000 - $ 80,000        

                                                   = $ 360,000

Note: Dividend on preferred stock is paid in preference to dividend on common Stock. In the given question dividend on preferred stock for each year was $ 300,000 (i.e. 100,000 X $ 50 per share X 6%). Since preferred stock is cumulative, any unpaid dividend on these will be accumulated and will be paid in subsequent years (subject to availability of Net Income) in preference to dividend on common stock.

In the given question, total dividend paid in the year 2016 was $ 160,000 which would have been entirely paid to preferred stock (as yearly dividend on preferred stock is $ 300,000). Thus unpaid dividend for the year 2016 will be $ 140,000 (i.e. $ 300,000 - $ 160,000).

Similarly, total dividend paid in the year 2017 was $ 80,000 which would have been entirely paid to preferred stock (as yearly dividend on preferred stock is $ 300,000). Thus unpaid dividend for the year 2017 will be $ 220,000 (i.e. $ 300,000 - $ 80,000).

Both these above unpaid dividends along with dividend for the year 2018 will be paid in the year 2018 in preference to dividend on common stock.

Calculation of dividend paid on preferred stock in the year 2018

Dividend on preferred stock in 2018 = Dividend on preferred stock for the year 2018 + Unpaid dividend on preferred stock for 2016 + Unpaid dividend on preferred stock for 2017

                                                  = $ 300,000 + $ 140,000 + $ 220,000

                                                 = $ 660,000