Sweet Company's outstanding stock consists of 1,000 shares of cumulative 5% preferred stock with a $100 par value and 10,000 shares of common stock with a $10 par value.During the first three years of operation,the corporation declared and paid the following total cash dividends.
$$\begin{array} { c c r }
& \text { Dividend Declared } \
\text { year 1 } & \$ 2,000 \
\text { year 2 } & \$ 6,000 \
\text { year 3 } & \$ 32,000
\end{array}$$

The amount of dividends paid to preferred and common shareholders in year 3 is:

Question

Sweet Company's outstanding stock consists of 1,000 shares of cumulative 5% preferred stock with a $100 par value and 10,000 shares of common stock with a $10 par value.During the first three years of operation,the corporation declared and paid the following total cash dividends.
$$\begin{array} { c c r } 
& \text { Dividend Declared } \
\text { year 1 } & \$ 2,000 \
\text { year 2 } & \$ 6,000 \
\text { year 3 } & \$ 32,000
\end{array}$$

The amount of dividends paid to preferred and common shareholders in year 3 is:

Quizplus · Accepted Answer

The preferred stock dividends are cumulative, meaning any unpaid dividends from previous years must be paid before common shareholders receive dividends. The annual preferred dividend is 5% of the $100 par value, which is $5 per share. With 1,000 shares, the total annual preferred dividend is $5,000. Over three years, this totals $15,000. In year 1, $2,000 was paid (all to preferred, leaving $3,000 unpaid). In year 2, $6,000 was paid (covering the $3,000 unpaid from year 1 and the current year's $5,000, leaving $2,000 unpaid). In year 3, the first $7,000 ($2,000 unpaid from year 2 and $5,000 for year 3) must go to preferred shareholders, leaving $25,000 ($32,000 - $7,000) for common shareholders.

Sweet Company's Outstanding Stock Consists of 1,000 Shares of Cumulative