Stars, Inc. has declared a $22,000 cash dividend to shareholders. The company has 3,000 shares of $14-par, 9% preferred stock and 12,000 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 $8,000 in arrears?

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Quizplus · Accepted Answer

The preferred stockholders are entitled to their current year dividend plus any arrears before any dividends are paid to common stockholders. The annual dividend for preferred stock is calculated as 9% of the par value ($14) times the number of preferred shares (3,000), which equals $3,780. Since the preferred stock is $8,000 in arrears, the total amount due to preferred stockholders is $3,780 (current year) + $8,000 (arrears) = $11,780. The remaining $22,000 - $11,780 = $10,220 is distributed to common stockholders.