The Magic Flute Company paid cash dividends totaling $250,000 in 2013 and $175,000 in 2014.In 2015,the company will pay cash dividends of $950,000.There were no dividends in arrears as of January 1,2013.There are 25,000 shares of common stock outstanding and 70,000 shares of 6 percent,$100 par cumulative preferred. What is the amount of cash dividends payable to common stockholders in 2015?

Question

Quizplus · Accepted Answer

Since the preferred stock is cumulative, it must be paid its dividends in full before any dividends can be paid to common stockholders. Therefore, the total dividends paid to the preferred stockholders in 2013 and 2014 is $70,000 per year ($100 par value x 6% dividend rate x 70,000 shares). This means that $140,000 of the $250,000 in 2013 and $175,000 in 2014 were paid to preferred stockholders, leaving $110,000 and $35,000, respectively, for common stockholders. In 2015, the preferred stockholders must be paid the full $490,000 ($100 par value x 6% dividend rate x 70,000 shares), leaving $460,000 for common stockholders. Dividing $460,000 by the 25,000 common shares gives a dividend payment of $18.40 per share. Multiplying $18.40 by the number of common shares (25,000) gives a total dividend payment to common stockholders of $460,000, leaving choice B as the correct answer.

The Magic Flute Company Paid Cash Dividends Totaling $250,000 in 2013