Colorful, Inc. was incorporated on January 1, 2016. Colorful issued 15,000 shares of common stock and 800 shares of preferred stock on that date. The preferred stock is cumulative, $100 par, with a 12% dividend rate. Colorful has not paid any dividends yet. In 2019, Colorful had its first profitable year, and on November 1, 2019, Colorful declared a total dividend of $44,000. What is the total amount that will be paid to common stockholders?

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Quizplus · Accepted Answer

The preferred stockholders are entitled to dividends for 2016, 2017, 2018, and 2019 before common stockholders receive any dividends. The annual dividend for preferred stock is 800 shares * $100 * 12% = $9,600. For four years, this totals $38,400. The remaining $5,600 ($44,000 - $38,400) is paid to common stockholders.