Question

Nathan's Athletic Apparel has 1,200 shares of 7%, $100 par value preferred stock the company issued at the beginning of 2020. All remaining shares are common stock. The company was not able to pay dividends in 2020, but plans to pay dividends of $18,000 in 2021. Required: 1. & 2. How much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021, assuming the preferred stock is cumulative? What if the preferred stock were noncumulative?

Answer 1

Answer:

Nathan's Athletic Apparel

1. Preferred Stock Dividend = $120,000 x 7% = $8,400 for one year

For two years = $16,800 ($8,400 x 2)

Common Stock Dividend = $1,200 ($18,000 - $16,800)

2.If the preferred stock were noncumulative, the dividends would be:

Preferred Stock Dividend = $120,000 x 7% = $8,400

Common Stock Dividend = $9,600 ($18,000 - $8,400)

Explanation:

Preferred Stockholders' Equity = $120,000 (1,200 x $100)

Cumulative preferred stock is the type of preferred stock that accumulates unpaid dividends.  If in any year the preferred dividend was not paid, the amount that was supposed to be paid would be carried forward to the next year when dividend is paid unlike an ordinary preferred stock that does not attract the arrears of dividend that was not paid in any given year.