Question

The Frank Company has issued 10%, fully participating, cumulative preferred stock with a total par value of $300,000 and common stock with a total par value of $900,000. Dividends for one previous year are in arrears. How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $222,000 are distributed at the end of the current year?a) $85,500 to preferred and $136,500 to common
b) $78,000 to preferred and $144,000 to common
c) $55,500 to preferred and $166,500 to common
d) $60,000 to preferred and $162,000 to common

Answer 1

Answer:

(D) $60,000 to preferred and $162,000 to common

Explanation:

Annual preference dividend = 10% * $300,000 = $30,000

Since dividends for the previous year were not paid, and the preference stock are cumulative, previous year dividend will need to be paid. ($30,000).

However, since no participating rule was defined, no additional dividend will be paid on preference stock.

Therefore, total payment on preference stock = current year dividend + previous year arrears = $30,000 + $30,000 = $60,000.

The balance will be paid on common stock

= $222,000 - $60,000 = $162,000