Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends:Year 1$10,000Year 245,000Year 390,000Determine the dividends per share for preferred and common stock for the third year.

Question

Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends:Year 1$10,000Year 245,000Year 390,000​Determine the dividends per share for preferred and common stock for the third year.

Quizplus · Accepted Answer

In the third year, preferred stockholders must be paid their cumulative dividends before any dividends are distributed to common stockholders. The annual dividend for preferred stock is 2% of the $100 par value, which equals $2 per share. With 20,000 shares, the total annual preferred dividend is $40,000. In Year 1, only $10,000 was distributed, which is less than the $40,000 needed for preferred dividends, leaving a $30,000 deficit. In Year 2, $45,000 was distributed; after covering the $30,000 deficit from Year 1, $15,000 of Year 2's dividends go towards the Year 2 preferred dividends, leaving a $25,000 deficit for Year 2. In Year 3, $90,000 is available for dividends. The first $25,000 covers the remaining Year 2 preferred dividend deficit, and the next $40,000 covers Year 3's preferred dividends, totaling $65,000 for preferred dividends. This leaves $25,000 for common stock dividends. With 100,000 shares of common stock, this results in a dividend of $0.25 per share. Therefore, preferred stockholders receive their full $2.00 per share, and common stockholders receive $0.25 per share.

Sabas Company Has 20,000 Shares of $100 Par, 2% Cumulative