The shareholders' equity of Red Corporation includes $200,000 of $1 par common stock and $400,000 par value of 6% cumulative preferred stock.The board of directors of Red declared cash dividends of $50,000 in 2016 after paying $20,000 cash dividends in 2015 and $40,000 in 2014.What is the amount of dividends common shareholders will receive in 2016?
A)$18,000.
B)$22,000.
C)$26,000.
D)$28,000.

Question

Quizplus · Accepted Answer

First, we need to determine if the preferred shareholders have any unpaid dividends. Since the preferred stock is cumulative, any unpaid dividends from previous years must be paid before common shareholders can receive any dividends. 
The total amount of unpaid dividends for the preferred stock is: 
($400,000 par value) x (6% dividend rate) x (2 years) = $48,000
Since the company paid $20,000 in dividends in 2015, the remaining unpaid dividends for the preferred stock is: 
$48,000 - $20,000 = $28,000

Therefore, the maximum amount of dividends that can be paid to common shareholders in 2016 is: 
$50,000 - $28,000 = $22,000

The Shareholders' Equity of Red Corporation Includes $200,000 of $1