A company has outstanding 10 million shares of $2 par common stock and 1 million shares of $4 par preferred stock.The preferred stock has an 8% dividend rate.The company declares $300,000 in total dividends for the year.Which of the following is true if the preferred stockholders have a cumulative dividend preference?
A)Preferred stockholders will receive the entire $300,000,and they must also be paid $20,000 before the end of the current accounting period.Common stockholders will receive nothing.
B)Preferred stockholders will receive $24,000 (8% of the total dividends).Common stockholders will receive the remaining $276,000.
C)Preferred stockholders will receive the entire $300,000,and they must also be paid $20,000 sometime in the future before common stockholders will receive anything.
D)Preferred stockholders will receive the entire $300,000,but will receive nothing more relating to this dividend declaration.Common stockholders will receive nothing.

Question

Quizplus · Accepted Answer

Since the preferred stock has a cumulative dividend preference, the company must first pay any dividends owed to the preferred stockholders before paying dividends to the common stockholders. In this case, the preferred stockholders are owed $80,000 (8% of $1 million), which must be paid before any dividends can be paid to the common stockholders. Therefore, the company must pay the preferred stockholders $300,000 in total ($80,000 in accumulated dividends plus $220,000 in current year dividends), and the common stockholders will receive nothing until this obligation is fulfilled. However, there is no requirement for the company to pay any additional dividends to the preferred stockholders beyond what is declared for the current year.

A Company Has Outstanding 10 Million Shares of $2 Par