Gracey's Department Stores has $200,000 of 6% noncumulative,nonparticipating,preferred stock outstanding.Gracey's also has $600,000 of common stock outstanding.During its first year,the company paid cash dividends of $30,000.This dividend should be distributed as follows:
A)$15,000 preferred;$15,000 common.
B)$6,000 preferred;$24,000 common.
C)$30,000 preferred;$0 common.
D)$12,000 preferred;$18,000 common.
E)$0 preferred;$30,000 common.

Question

Quizplus · Accepted Answer

The preferred stock is noncumulative and nonparticipating, which means that it does not have any special rights to receive dividends before any dividends are paid to common stockholders or to participate in any extra dividends paid to common stockholders. Therefore, the $30,000 dividend should be distributed to both preferred and common stockholders proportionally based on their ownership.

The preferred stock represents 25% of the total stock outstanding ($200,000/$800,000), so it should receive 25% of the dividend, which is $7,500. The remaining 75% of the dividend, which is $22,500, should be distributed to the common stockholders.

Therefore, the preferred stock should receive $12,000 ($7,500 rounded to the nearest thousand) and the common stock should receive $18,000 ($22,500 rounded to the nearest thousand).

Choice D is the only option that matches this distribution.

Gracey's Department Stores Has $200,000 of 6% Noncumulative,nonparticipating,preferred Stock Outstanding