Berman Inc.has 6,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2019, and December 31, 2020.The board of directors declared and paid a $12,000 dividend in 2019.In 2020, $72,000 of dividends are declared and paid.What are the dividends received by the common stockholders in 2020?
A)$48,000.
B)$42,000.
C)$54,000.
D)$18,000.

Question

Quizplus · Accepted Answer

The preferred stock is cumulative, which means that any dividends that are not paid in a given year must be paid in a later year before any dividends can be paid to the common stockholders. In 2019, the preferred stockholders are entitled to a dividend of $36,000 (6,000 shares x $6 per share). Since only $12,000 of dividends were paid in 2019, the preferred stockholders are entitled to an additional $24,000 of dividends in 2020. This means that the common stockholders will only receive dividends if the total dividends paid in 2020 exceed $24,000. Since $72,000 of dividends were paid in 2020, the common stockholders will receive $48,000 of dividends ($72,000 - $24,000).