Question

The shareholders' equity of Red Corporation includes $200,000 of $1 par common stock and $400,000 par of 6% cumulative preferred stock.
The board of directors of Red declared cash dividends of $50,000 in 2021 after paying $20,000 cash dividends in 2020 and $40,000 in 2019.

What is the amount of dividends common shareholders will receive in 2021?

a. $18,000.
b. $22,000.
c. $26,000.

Answer 1

Answer:

b. 22,000

Explanation:

The computation of amount of dividends common shareholders is shown below:-

Amount of annual preferred stock dividend that preferred stockholders are supposed to get.

= $400,000 par value × 6% = $24,000

          Total Cash         Paid to          Paid to       Dividends in Arrears at

           Dividend paid     Preferred      Common        Year end

2011         $40,000        $24,000        $16,000

2012         $20,000       $20,000                              $4,000

2013          $50,000      $28,000         $22,000

Total         $110,000      $72,000          $38,000

Amount of Dividend Common Shareholders will receive in 2013 = $ 22,000

This is because, out of $ 50,000 dividend declared, $ 28000 will be for preferred stockholders ($24000 annual + $4000 arrears)