Venco Corporation's December 31, 2010 balance sheet showed the following:
8% preferred stock, $20 par value, cumulative, 10,000 shares
Venco declared and paid a $38,000 cash dividend on December 15, 2010. If the company's dividends in arrears prior to that date were $9,000, Triad's common stockholders received

Question

Venco Corporation's December 31, 2010 balance sheet showed the following:
8% preferred stock, $20 par value, cumulative, 10,000 shares 
Venco declared and paid a $38,000 cash dividend on December 15, 2010. If the company's dividends in arrears prior to that date were $9,000, Triad's common stockholders received

Quizplus · Accepted Answer

Since the preferred stock is cumulative, the company must pay any missed dividends before paying dividends to common stockholders. Therefore, the $9,000 in dividends in arrears must be paid before any dividends can be paid to common stockholders. The $38,000 cash dividend paid on December 15, 2010 covers $20,000 of the dividends in arrears ($20 par value x 10,000 shares) and $18,000 current dividends (10,000 shares x 8% x $20 par value x 1/12 year). This leaves $1,000 in dividends in arrears ($9,000 - $8,000). Therefore, $12,000 can be paid to common stockholders ($20,000 - $8,000 in arrears), and since the common stockholders are entitled to one-third of the remaining $12,000 (assuming they have a 3:1 stock split), they will receive $4,000. Therefore, the answer is C: $17,000 ($12,000 to preferred stockholders and $5,000 ($4,000 to common stockholders and $1,000 in arrears) to common stockholders.)

Venco Corporation's December 31, 2010 Balance Sheet Showed the Following