Honig Corporation had the following shares of stock outstanding on December 31, 2010 : Common stock, $50 par value, 100,000 shares outstanding
Preferred stock, 8 percent, $100 par value, cumulative, 10,000 shares outstanding
Dividends were in arrears for 2008 and 2009. On December 31, 2010 , total cash dividends of $400,000 were declared. The total amounts payable to preferred stockholders and common stockholders, respectively, are

Question

Quizplus · Accepted Answer

The preferred stock is cumulative, meaning that all past unpaid dividends must be paid before any dividends can be paid to common stockholders. Therefore, the $400,000 in dividends declared must first go towards paying the dividends in arrears for the preferred stock.

Dividends in arrears for preferred stock = (10,000 shares x $100 par value x 8%) x 2 years = $160,000

After paying the dividends in arrears, the remaining $240,000 would be paid out to both preferred and common stockholders.

Amount payable to preferred stockholders = Dividends in arrears + current year dividend = $160,000 + $80,000 = $240,000

Amount payable to common stockholders = Current year dividend - amount payable to preferred stockholders = $400,000 - $240,000 = $160,000

Honig Corporation Had the Following Shares of Stock Outstanding on December