The outstanding stock of Adam Baum Company is composed of 25,000 shares of $100 par, 2%, cumulative preferred stock and 200,000 shares of $5 par common stock. Dividends have not been paid for the current year or the previous year. If $180,000 is to be distributed as dividends for the current year, what total amount will be distributed to the common stockholders?

Question

Quizplus · Accepted Answer

First, the total amount of dividends owed to the preferred stockholders must be calculated. Since the preferred stock is cumulative, any missed dividends must be paid before any dividends can be distributed to the common stockholders. The preferred stock has a dividend rate of 2% of par value, which is $2 per share ($100 x 2%). So the total amount owed to the preferred stockholders for two years is:
25,000 shares x $2 per share x 2 years = $100,000
This means that $100,000 of the $180,000 total dividend payment must go to the preferred stockholders, leaving $80,000 for the common stockholders. To calculate the dividend per share for the common stockholders, divide $80,000 by 200,000 shares:
$80,000 ÷ 200,000 shares = $0.40 per share
Therefore, the answer is D ($80,000).

The Outstanding Stock of Adam Baum Company Is Composed of 25,000