Question

Brown Corporation has 500,000 shares of 9%, $40 par value cumulative preferred stock authorized, 100,000 shares issued, and 80,000 shares outstanding. In addition, Brown Corporation has 1,300,000 shares of $10 par value common stock issued and outstanding. Dividends relative to the preferred stock are two years in arrears. If Brown declares a $2,000,000 dividend during the current period, the amount of the dividend applicable to the preferred and common stockholders is:a. $576,000 and $1,424,000, respectivelyb. $720,000 and $1,280,000, respectivelyc. $1,080,000 and $920,000, respectivelyd. $864,000 and $1,136,000, respectively

Answer 1

Answer:

D. $864,000 and $1,136,000, respectively

Explanation:

As the preferred stock dividend is cumulative, the company has to pay any outstanding dividend to preferred stockholders'.

Given,

Dividends relative to the preferred stock are two years in arrears.

Number of preferred shares outstanding = 80,000 shares

Par value = $40

Dividend rate = 9%

Annual dividend = 80,000 shares × $40 × 9% = $288,000

Therefore, current year preferred dividend = $288,000

As dividends were outstanding for the previous 2 years, last 2 years dividends = $288,000 + $288,000 = $576,000

Total dividends to be payable to preferred stockholders = $576,000 + $288,000 = $864,000

Therefore, common stockholders will receive = $2,000,000 - $864,000 = $1,136,000.

Therefore, option D is the answer.