Outstanding stock of the Colt Corporation included 20,000 shares of $5 par common stock and 5,000 shares of 5%, $10 par noncumulative preferred stock. In 2009, Colt declared and paid dividends of $2,000. In 2010, Colt declared and paid dividends of $6,000. How much of the 2010 dividend was distributed to preferred shareholders?

Question

Quizplus · Accepted Answer

Since the preferred stock is noncumulative, any dividends not paid in a given year do not carry over to the next year. Therefore, the 2009 dividend of $2,000 goes entirely to the common shareholders, since the preferred shareholders have no unpaid dividends from previous years.

In 2010, the total dividend paid was $6,000. Since the preferred stock pays a fixed dividend of 5% of its par value ($10), the annual dividend per share is $0.50.

The total annual dividend on the preferred stock is: 
$0.50 per share x 5,000 shares = $2,500

Therefore, the remaining $6,000 - $2,500 = $3,500 of the 2010 dividend was distributed to common shareholders.

The correct answer is (C) $2,500.

Outstanding Stock of the Colt Corporation Included 20,000 Shares of $5