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, 2015. There were no dividends declared in 2013. The board of directors declares and pays a $45,000 dividend in 2014 and in 2015. What is the amount of dividends received by the common stockholders in 2015?

Question

Quizplus · Accepted Answer

Preferred stock is entitled to a fixed dividend before any dividends can be paid to common stockholders. The preferred stock has a 4% dividend rate, which means that the preferred stockholders are entitled to receive $4 per share in dividends each year. There are 5,000 shares of preferred stock outstanding, so the total amount of dividends that must be paid to preferred stockholders each year is $20,000.In 2014, the board of directors declared and paid a $45,000 dividend. This dividend was first used to pay the preferred stockholders their $20,000 dividend. The remaining $25,000 was then distributed to the common stockholders.In 2015, the board of directors again declared and paid a $45,000 dividend. This dividend was again first used to pay the preferred stockholders their $20,000 dividend. The remaining $25,000 was then distributed to the common stockholders.Therefore, the common stockholders received $25,000 in dividends in 2015.

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