Watson Inc.has 10000 shares of 5% $100 par value cumulative preferred stock and 20000 shares of $1 par value common stock outstanding at December 31 2022.There were no dividends declared in 2020.The board of directors declares and pays a $90000 dividend in 2021 and in 2022.What is the amount of dividends received by the common stockholders in 2022?

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 has a 5% dividend rate, which means that the preferred stockholders are entitled to receive $5 per share in dividends each year. Since there were no dividends declared in 2020, the preferred stockholders are entitled to receive $50,000 in dividends in 2021 and 2022. This leaves $40,000 of the dividend to be paid to the common stockholders.