Watson, Inc. has 10,000 shares of 6%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2014. There were no dividends declared in 2012. The board of directors declares and pays a $100,000 dividend in 2013 and in 2014. What is the amount of dividends received by the common stockholders in 2014?
A) $20,000.
B) $60,000.
C) $100,000.
D) $0.

Question

Quizplus · Accepted Answer

The preferred stock is cumulative, which means that any dividends that are not paid in one year must be paid in a later year before any dividends can be paid to the common stockholders. In this case, the preferred stock is entitled to a dividend of $6 per share, or a total of $60,000. Since no dividends were declared in 2012, the preferred stockholders are entitled to $120,000 in dividends ($60,000 for 2012 and $60,000 for 2013). The remaining $40,000 of the $100,000 dividend declared in 2014 is available for distribution to the common stockholders.