Evergreen Building, Inc. has declared a $43,000 cash dividend to shareholders. The company has 4,500 shares of $20-par, 5% preferred stock and 20,000 shares of $20-par common stock. The preferred stock is cumulative. How much will be distributed to the preferred and common stockholders on the date of payment if the preferred stock is $12,000 in arrears?

Question

Quizplus · Accepted Answer

Since the preferred stock is cumulative, it must receive all dividends in arrears before any dividends can be paid to common stockholders.

Dividend amount for preferred stock = (Number of preferred shares x Par value per share x Dividend rate) + Dividends in arrears
= (4,500 x $20 x 5%) + $12,000 (since it is in arrears)
= $4,500 + $12,000
= $16,500

Remaining dividend amount for common stock = Total dividend amount - Dividend amount for preferred stock
= $43,000 - $16,500
= $26,500

Therefore, $16,500 will be distributed to preferred stockholders and $26,500 will be distributed to common stockholders on the date of payment. Answer choice C is the correct choice.