Question

The Magic Flute Company paid cash dividends totaling $ 270 comma 000 in 2016 and $ 175 comma 000 in 2017. In​ 2018, the company will pay cash dividends of $ 955 comma 000. There were no dividends in arrears as of January​ 1, 2016. There are 28 comma 000 shares of common stock outstanding and 70 comma 000 shares of 6​ percent, $100 par cumulative preferred stock outstanding. What is the amount of cash dividends payable to common stockholders in​ 2018?

Answer 1

Answer:

$140,000

Explanation:

Preferred stockholders has an advantage that they are paid first when there is any dividend is announced. The residual dividend will be divided into the common stockholders. Any prior years due dividend and current years dividend associated with preferred share will be paid first.

Preferred Share Value = 70,000 units x $100 = $7,000,000

Preferred Dividend = $7,000,000 x 6% = $420,000

Arrears = Preferred dividend - Dividend paid in the period

Arrears in 2016 =  $420,000 - 270,000 = $150,000

Arrears in 2017 =  $420,000 - 175,000 = $245,000

Total Arrears = $150,000 + $245,000 = $395,000

2018

Dividend Paid to common stockholders 2018 = Dividend Paid - Preferred Stock dividend 2018 - Arrears of Preferred Stock dividend

Dividend Paid to common stockholders 2018 = $955,000 - $420,000 - $395,000 = $140,000