Stonework Company's outstanding stock is 100 shares of $100,6% cumulative preferred stock and 2,000 shares of $10 par common stock.Stonework paid $2,000 in cash dividends including one-year dividends in arrears to preferred stockholders.Common stockholders received:

Question

Quizplus · Accepted Answer

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

The total amount of dividends owed to the preferred stockholders is:
100 shares * $100 per share * 6% dividend rate = $6,000 per year
Dividend in arrears for one year = $6,000 * 1 year = $6,000

Since Stonework paid $2,000 in cash dividends to preferred stockholders, this means they paid $2,000 - $6,000 = -$4,000 in arrears. This negative amount means that the preferred stockholders still need to be paid the remaining $4,000 in arrears before any dividends can be paid to common stockholders.

Therefore, no dividends can be paid to common stockholders in this scenario. The answer options A and C can be ruled out.

The only remaining option is B, which states that common stockholders received $800 in dividends. This option is incorrect as there are no dividends left to distribute to common stockholders.

Stonework Company's Outstanding Stock Is 100 Shares of $100,6% Cumulative