The outstanding stock of The Rip Torn Company is composed of 10,000 shares of $50 par, 10%, cumulative preferred stock and 50,000 shares of $20 par common stock. Dividends have not been paid for the current year or the previous two years. If $240,000 is to be distributed as dividends for the current year, what total amount will be distributed to the preferred stockholders?

Question

Quizplus · Accepted Answer

Since the preferred stock is cumulative, the preferred stockholders must receive all dividends in arrears before any dividends can be paid to common stockholders. The current year's dividend would be $5 per share for the preferred stock (($50 x 10%) = $5), totaling $50,000 (($5 x 10,000 shares) = $50,000). The remaining $190,000 ($240,000 - $50,000) will then be distributed to common stockholders. Therefore, the total amount distributed to preferred stockholders is $50,000.

The Outstanding Stock of the Rip Torn Company Is Composed