Torino Company has 10,000 shares of $5 par value,4% cumulative and nonparticipating preferred stock and 100,000 shares of $10 par value common stock outstanding.The company paid total cash dividends of $1,000 in its first year of operation.The cash dividend that must be paid to preferred stockholders in the second year before any dividend is paid to common stockholders is:
A)$1,000.
B)$2,000.
C)$3,000.
D)$4,000.
E)$0.

Question

Quizplus · Accepted Answer

The preferred stockholders are entitled to a 4% dividend on their $5 par value shares, which is $2,000 annually (10,000 shares x $5 x 4%). Since only $1,000 was paid in the first year, $1,000 is in arrears. Therefore, in the second year, $3,000 must be paid to preferred stockholders before any dividends can be paid to common stockholders.

Torino Company Has 10,000 Shares of $5 Par Value,4% Cumulative