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:
Determine the dividends per share for preferred and common stock for the first 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: ​
 Determine the dividends per share for preferred and common stock for the first year.

Quizplus · Accepted Answer

The preferred stock is cumulative, which means that any unpaid dividends accumulate and must be paid before common stock dividends can be issued. Therefore, the preferred stock is entitled to receive $2,000 (2% of $100 par * 20,000 shares) in dividends for the first year. 
The remaining amount of dividends available for distribution is $3,000 ($5,000 - $2,000). 
Dividing this amount by the number of outstanding common shares ($50 par * 100,000 shares), we get $0.06 per share. 
Therefore, the dividends per share for preferred and common stock for the first year are $0.50 and $0.06, respectively. 
However, since the preferred stock is cumulative and entitled to receive its unpaid dividends before the common stock, no dividends are available for the common stock in the first year. 
Therefore, the best choice is C ($0.50 and $0.00).

Sabas Company Has 20,000 Shares of $100 Par,2% Cumulative Preferred