Torino Company has 10,000 shares of $5 par value, 4% cumulative and nonparticipating preferred stock and 100,000 shares of $10 par value common stock outstanding. The company paid total cash dividends of $1,000 in its first year of operation. The cash dividend that must be paid to preferred stockholders in the second year before any dividend is paid to common stockholders is:

Question

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The preferred stock is cumulative, meaning any unpaid dividends from the previous year must be paid before common stockholders receive dividends. In the first year, preferred stockholders were supposed to receive $2,000 (10,000 shares * $5 par value * 4%), but only $1,000 was paid. Therefore, $1,000 is in arrears. In the second year, they must receive $2,000 for the current year plus the $1,000 in arrears, totaling $3,000.

Torino Company Has 10,000 Shares of $5 Par Value, 4