Brewer Inc. has 5,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. The board of directors declared and paid a $12,000 dividend in 2016. In 2017, $60,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2017?

Question

Quizplus · Accepted Answer

The preferred stock is cumulative, which means that any unpaid dividends accumulate and have to be paid before any dividends can be paid to common stockholders. In 2016, $12,000 of dividends were paid, leaving $48,000 ($60,000 - $12,000) of unpaid dividends.

In 2017, the preferred stockholders are entitled to receive the $60,000 of declared dividends before any dividends can be paid to common stockholders. Therefore, the preferred stockholders will receive the $48,000 of accumulated unpaid dividends from 2016 plus $12,000 of current year dividends for a total of $60,000 in dividends for 2017.

The dividends received by preferred stockholders in 2017 are $60,000. However, the question is asking specifically for the dividends received by the preferred stockholders in 2017, so the answer is $18,000 ($60,000 - $42,000 of accumulated unpaid dividends from 2016).