Art, Inc., has 5,000 shares of 4%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2018. There were no dividends declared in 2016. The board of directors declares and pays a $45,000 dividend in 2017 and in 2018. What is the amount of dividends received by the common stockholders in 2018?

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Quizplus · Accepted Answer

The preferred stock is cumulative, which means that any dividends that are not paid in one year must be paid in a subsequent year before any dividends can be paid to the common stockholders. In this case, the preferred stock is entitled to a $20,000 dividend each year (5,000 shares x $4 dividend rate x 100 par value). Since no dividends were declared in 2016, the preferred stockholders are entitled to a $40,000 dividend in 2017 and 2018. The common stockholders will not receive any dividends until the preferred stockholders have received their full dividend. Therefore, the common stockholders will receive $25,000 in dividends in 2018 ($45,000 total dividend - $20,000 preferred stock dividend).

Art, Inc, Has 5,000 Shares of 4%, $100 Par Value, Cumulative