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, 2015, and December 31, 2014. The board of directors declared and paid a $4,000 dividend in 2014. In 2015, $24,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2015?

Question

Quizplus · Accepted Answer

The preferred stock is cumulative, which means any unpaid dividends accumulate from year to year until they are paid. In 2014, the preferred stockholders received $4,000 in dividends, leaving $2,000 in accumulated dividends ($50 par value x 6% annual dividend x 2 years = $6 per share x 2,000 shares = $12,000 - $4,000 paid in 2014 = $8,000 accumulated). In 2015, the preferred stockholders are entitled to their current year dividend of $6 per share ($50 par value x 6% annual dividend). The total dividend payable to the preferred stockholders in 2015 is:
($50 par value x 6% annual dividend x 2,000 shares) + $8,000 accumulated dividends = $6,000 + $8,000 = $14,000
However, since the preferred stock is cumulative, the preferred stockholders will receive the full $24,000 dividend declared and the common stockholders will receive the remaining $10,000. So, the preferred stockholders will receive $14,000 in 2015 ($4,000 in current year dividend + $10,000 in accumulated dividends). Therefore, the answer is C) $8,000.

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