Question

The following information is provided for Slickers, Inc. for year 2016: • Preferred stock, 5%, $20 par value, 1,500 shares issued and outstanding • Common stock, $50 par value, 3,000 shares issued and outstanding • Dividends in arrears for 2013, 2014, 2015 • Total dividends declared and paid during 2016 totaled $10,000 How much of the dividend is paid to the common stockholders during 2016 assuming the preferred stock is cumulative?

Answer 1

Answer:

The amount of dividends paid to common stockholders in 2016 is $4000

Explanation:

The cumulative preferred shares are the shares that accumulate dividends in case the dividends on these shares are not paid or paid partially in a year. The accumulated dividends will need to be paid first whenever the company declares dividends.

The amounts of dividends on preferred share for one year is,

Dividends - Preferred shares = 20 * 0.05 * 1500  =  $1500

Thus, the accumulated dividends on these preferred shares at start of 2016 is,

Accumulated dividends - Preferred shares = 1500 * 3 = $4500

The common shares holders are paid after the preferred share holders have been paid. This means that we will deduct the amount of accumulated dividends on preferred shares and the dividends for this year on preferred shares from the total dividends to calculate the amount to be paid to common share holders as dividends.

Common stock dividends =  10000 - (4500 + 1500)   = $4000