Last Inc., has 2,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2018, and December 31, 2017. The board of directors declared and paid a $4,000 dividend in 2017. In 2018, $24,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2018?

Question

Quizplus · Accepted Answer

Preferred stockholders have a cumulative dividend, meaning any unpaid dividends from prior years must be paid before any common stock dividends. Therefore, in 2018, the preferred stockholders must first receive the $4,000 dividend from 2017 that was not paid. This leaves $20,000 ($24,000 - $4,000) available for dividends in 2018.

The preferred stock pays a fixed dividend of 6% of the $50 par value, which equals $3 per share. There are 2,000 preferred shares outstanding, so the total dividends paid to the preferred stockholders in 2018 is:

$3 x 2,000 = $6,000

Therefore, the correct answer is (C) $8,000.

Last Inc, Has 2,000 Shares of 6%, $50 Par Value, Cumulative