On January 1, 2019, a company issued 10,000 shares of 10%, $10 par value cumulative preferred stock. No dividends were declared in 2019 or 2020. In 2021, the company declared a dividend of $200,000. How much of the 2021 dividend should be paid to common stockholders?

Question

Quizplus · Accepted Answer

To determine how much of the 2021 dividend should be paid to common stockholders, we first need to calculate the dividends owed to the preferred stockholders, considering that the preferred stock is cumulative.
Here are the steps to calculate the dividends owed to preferred stockholders:
1. Calculate the annual dividend per share for preferred stock:
   The preferred stock has a 10% dividend rate on a $10 par value, so the annual dividend per share is:
   10% of $10 = $1.00 per share
2. Calculate the total annual dividend for all preferred shares:
   The company issued 10,000 shares of preferred stock, so the total annual dividend for all preferred shares is:
   10,000 shares * $1.00 per share = $10,000
3. Calculate the total dividends in arrears for the years when no dividends were paid (2019 and 2020):
   Since no dividends were declared in 2019 or 2020, the preferred stockholders are owed dividends for those years due to the cumulative feature. The total dividends in arrears are:
   2 years * $10,000 per year = $20,000
4. Calculate the total preferred dividends owed before any dividends can be paid to common stockholders in 2021:
   The preferred stockholders are owed the dividends in arrears plus the current year's dividend:
   $20,000 (arrears) + $10,000 (for 2021) = $30,000
Now that we know the preferred stockholders are owed $30,000 in total, we can determine how much of the $200,000 declared dividend for 2021 should be paid to common stockholders:
Total declared dividend - Total preferred dividends owed = Dividend for common stockholders
$200,000 - $30,000 = $170,000
Therefore, $170,000 of the 2021 dividend should be paid to common stockholders.
The correct answer is:
a. $170,000

On January 1, 2019, a Company Issued 10,000 Shares of 10