Watson Company has 5,000 shares of $5 par,3% preferred stock outstanding and 25,000 shares of $2 par common stock outstanding.The preferred stock is cumulative,and no dividends have been paid for the past two years.If the company wishes to distribute $2 per share to the common stockholders,what is the total amount of dividends that must be paid in the current year?

Question

Quizplus · Accepted Answer

First, we need to calculate the total amount of unpaid dividends for the preferred stock. Since the preferred stock is cumulative, the unpaid dividends accumulate from year to year until they are paid.

Unpaid dividends for each year = $5 par value * 3% dividend rate = $0.15 per share

Unpaid dividends for the past two years = $0.15 per share * 5,000 shares * 2 years = $1,500

Therefore, the total amount of dividends that must be paid to the preferred stockholders for the current year is:

$0.15 per share * 5,000 shares = $750

The total amount of dividends that must be paid to the common stockholders is $2 per share * 25,000 shares = $50,000

Therefore, the total amount of dividends that must be paid in the current year is:

$750 + $50,000 = $51,500

So, the correct answer is D.

Watson Company Has 5,000 Shares of $5 Par,3% Preferred Stock