A company has outstanding 10 million shares of $2 par common stock and 1 million shares of $4 par preferred stock.The preferred stock has an 8% dividend rate.The board of directors declares $300,000 in total dividends for the year.Which of the following is correct if the preferred stockholders have a cumulative dividend preference?
A)Preferred stockholders will receive the entire $300,000 and they must also be paid $20,000 before the end of the current accounting period;common stockholders will receive nothing.
B)Preferred stockholders will receive $24,000 (or 8% of the total dividends);common stockholders will receive the remaining $276,000 (or $300,000 − $24,000).
C)Preferred stockholders will receive the entire $300,000 and they must also be paid the remaining $20,000 sometime in the future before common stockholders will receive any dividends.
D)Preferred stockholders will receive the entire $300,000,but will receive nothing more in the future relating to this dividend declaration;common stockholders will receive nothing.

Question

Quizplus · Accepted Answer

Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate
= 1,000,000 shares × $4 per share × 0.08 = $320,000 (if fully declared)
Current preferred dividend − Dividends paid to preferred stockholders = Dividends in arrears
= $320,000 − $300,000 = $20,000

A Company Has Outstanding 10 Million Shares of $2 Par