Flanders Company has outstanding 18 million shares of $2 par value common stock and 2 million shares of $4 par value preferred stock.The preferred stock has an 8% dividend rate.The company declares $1,200,000 in total dividends for the year.Which of the following is correct if dividends in arrears are $60,000?

Question

Quizplus · Accepted Answer

Since there are dividends in arrears,the preferred stock must have a cumulative dividend preference.
Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate
= 2,000,000 shares × $4 per share × 0.08 = $640,000
Total preferred dividends = Current preferred dividend + Dividends in arrears
= $60,000 + $640,000 = $700,000
Common dividend = Total dividend declared − Total preferred dividends
= $1,200,000 − $700,000 = $500,000

Flanders Company Has Outstanding 18 Million Shares of $2 Par