Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: $\begin{array}{lr}
\text { Year 1: } & \$ 10,000 \
\text { Year 2: } & 45,000 \
\text { Year 3: } & 90,000
\end{array}$
Determine the dividends per share for preferred and common stock for the second year.

Question

Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: $\begin{array}{lr}
\text { Year 1: } & \$ 10,000 \
\text { Year 2: } & 45,000 \
\text { Year 3: } & 90,000
\end{array}$ 
 Determine the dividends per share for preferred and common stock for the second year.

Quizplus · Accepted Answer

The preferred stock dividends must be paid before common stock dividends. The annual dividend for preferred stock is 2% of $100 par value, which equals $2 per share. With 20,000 shares, the total annual preferred dividend is $40,000. In Year 1, only $10,000 was distributed, leaving a $30,000 deficit for preferred dividends. In Year 2, $45,000 was distributed. The first $30,000 covers the deficit from Year 1, and the remaining $15,000 covers part of Year 2's $40,000 preferred dividends, leaving a $25,000 deficit. Therefore, no dividends are paid to common stockholders in Year 2, and preferred stockholders receive only a portion of their dividends ($15,000 for Year 2), which does not equate to the full $2 per share annual rate, thus making the calculation and the provided choices inconsistent with the scenario described. However, based on the choices provided and the typical approach to such questions, there seems to have been an oversight in the explanation process, assuming all preferred dividends were fully paid before any common dividends. Given the scenario and typical dividend distribution rules, none of the choices accurately reflect the correct distribution based on the explanation provided. The correct approach would involve ensuring the preferred dividends are fully covered before any common dividends are distributed, but the given choices and the calculation mistake do not align with the standard procedure for dividend distribution.

Sabas Company Has 20,000 Shares of $100 Par, 2% Cumulative Year 1: $10,000 Year 2: 45,000 Year 3: 90,000\begin{array}{lr}\text { Year 1: } & \$ 10,000 \\\text { Year 2: } & 45,000 \\\text { Year 3: } & 90,000\end{array} Year 1: Year 2: Year 3: ​$10,00045,00090,000​

Sabas Company Has 20,000 Shares of $100 Par, 2% Cumulative $\begin{array}{lr}\text { Year 1: } & \$ 10,000 \\\text { Year 2: } & 45,000 \\\text { Year 3: } & 90,000\end{array}$