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

Since the preferred stock is cumulative, it is entitled to receive dividends in arrears before common stockholders can receive dividends. The total amount of dividends in arrears is $10,000 (20,000 shares x $100 par value x 2% dividend rate x 1 year in arrears). The preferred stockholders are entitled to receive this amount before any dividends can be paid to common stockholders.

After paying the dividends in arrears, the amount of dividends available for the current year is $80,000 ($400,000 - $10,000 - $310,000 - $0). Since the preferred stock is entitled to receive dividends before common stockholders, the $10,000 of dividends in arrears is first paid to the preferred stockholders, leaving $70,000 ($80,000 - $10,000) available for the current year.

Dividends per share for preferred stock = ($10,000 + $70,000)/20,000 shares = $4 per share
Dividends per share for common stock = $310,000/100,000 shares = $3.10 per share

Dividends per share for preferred stock = $4/$100 par value = $0.50 per share
Dividends per share for common stock = $3.10/$50 par value = $0.10 per share

Therefore, the dividends per share for preferred and common stock for the first year are $0.50 and $0.10, respectively, making choice C the correct answer.

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