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 2013 after paying $20,000 cash dividends in 2012 and $40,000 in 2011. What is the amount of dividends common shareholders will receive in 2013?
A)$18,000.
B)$22,000.
C)$26,000.
D)$28,000.

Question

Quizplus · Accepted Answer

The preferred stock is cumulative, which means that any unpaid dividends from previous years must be paid first before any dividends can be paid to common shareholders. 
Total dividends declared for 2011, 2012, and 2013 is $110,000 ($40,000 + $20,000 + $50,000). 
Preferred stock dividends for the 3 years is 6% × $400,000 × 3 = $72,000. 
Thus, the amount of dividends that preferred shareholders are entitled to receive is $72,000, leaving $38,000 ($110,000 - $72,000) for the common shareholders. 
Therefore, the dividend amount common shareholders will receive in 2013 is $38,000, or $38,000 ÷ 200,000 shares outstanding = $0.19 per share. 
$0.19 per share × 115,000 common shares outstanding = $22,000. Therefore, the correct answer is B.

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