Use the following information for questions 70-72.
Riga Ltd. has outstanding 100,000 no par common shares and 20,000 no par, $ 0.40, preferred shares issued at $ 5 each. The preferred shares are cumulative and non-participating. Dividends have been paid every year except the past two years and the current year.
-Assuming that $ 50,000 will be distributed as a dividend in the current year, how much will the common shareholders receive?
A) $ 24,000
B) $ 26,000
C) $ 34,000
D) $ 42,000

Question

Quizplus · Accepted Answer

Since the preferred shares are cumulative, the dividend arrears for each year must be paid before any dividend can be paid to the common shareholders. The total dividend arrears for the preferred shares is $ 16,000 (20,000 preferred shares x $ 0.40 dividend rate x 2 years). The remaining $ 34,000 ($ 50,000 - $ 16,000) will be distributed to the common shareholders. To calculate the amount per common share, divide $ 34,000 by 100,000 common shares, which gives $ 0.34 per common share. Therefore, the common shareholders will receive $ 0.34 per share x 100,000 shares = $ 34,000. However, since the question asks for how much the common shareholders will receive in excess of the preferred shareholders, we need to subtract the total dividend amount paid to the preferred shareholders, which is $ 16,000. Therefore, the common shareholders will receive $ 34,000 - $ 16,000 = $ 18,000 or $ 0.18 per common share.

Use the Following Information for Questions 70-72