Question

The outstanding stock is composed of 10,000 shares of $100 par, cumulative preferred 5% stock, and 50,000 shares of $20 par common stock. Preferred dividends have been paid every year except for the preceding two years and the current year. If $145,000 is to be distributed as a dividend for the current year, what total amount will be distributed to the preferred stockholders?

Answer 1

Answer:

Therefore out of $145,000, dividend to preference share holders = $145,000

Explanation:

Whenever there is issue of preference shares, cumulative in nature then the dividend has to be paid every year, in case the dividend is not paid for any year, then that amount accumulates as it is a kind of liability to be settled.

Before any payment of dividend to common stock holders all the dividend accumulated to preference share holders shall be paid.

Here, preference dividend for each year = 10,000 $\times$ $100 $\times$ 5% = $50,000

Therefore, out of current year dividend 50,000 $\times$ 2 = $100,000 has to be paid to preference shareholders as past year dividend.

In the current year dividend = $145,000 -$100,000 = $45,000

This also will be paid to preference shareholders as their dividend for a year = $50,000

and out of this $50,000 - $45,000 = $5,000 will be due on preference shares in next year.

As this rate of dividend cannot be decreased, and dividend has to be paid at this rate minimum.

Therefore out of $145,000, dividend to preference share holders = $145,000