Question

Outstanding stock of the West Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 5%, $10 par non-cumulative preferred stock. In 2016, West declared and paid dividends of $4,000. In 2017, West declared and paid dividends of $20,000. How much of the 2017 dividend was distributed to preferred shareholders? $9,000. $15,000. $5,000. None of these answer choices are correct.

Answer 1

Answer:

2017 preferred shareholders  = $5,000

so correct option is $5,000

Explanation:

given data

Outstanding stock = 40,000 shares

common stock = $5

share = 10000  @ 5%

non-cumulative preferred stock = $10

2016 paid dividends = $4,000

2017 paid dividends = $20,000

to find out

2017 dividend was distributed to preferred shareholders

solution

we know here that preferred shares is 5%, $10 par, and there are 10,000 shares outstanding

so preferred shareholders is here

preferred shareholders = $10 ×  5% × 10,000 = $5,000

and here $4,000 in dividends declared in 2016

so preferred shareholders received all of that and when preferred shared were cumulative

so in 2017 the preferred shareholders will be

2017 the preferred shareholders =  $5,000 + ($5,000 - $4,000) = $6,000

but here when preferred shares are non cumulative

it means that the 2016 shortfall does not carry over to 2017

so in 2017 preferred shareholders receive just the normal amount that is

2017 preferred shareholders = $10 ×  5% × 10,000

2017 preferred shareholders  = $5,000

so correct option is $5,000