Question

Halverstein Company's outstanding stock consists of 11,900 shares of cumulative 5% preferred stock with a $10 par value and 5,100 shares of common stock with a $1 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends. Dividend Declared Year 1 $ 0 Year 2 $ 10,200 Year 3 $ 43,000 The amount of dividends paid to preferred and common shareholders in Year 2 is:

Answer 1

Answer:

$10,200 for preferred shareholders and the $0 for common shareholders

Explanation:

The cumulative shares are those shares if any year the payment of dividend is not paid so it would be carried forward to the next year and the lump sum amount is paid and the amount of dividend is paid first to preference shareholders after that the equity shareholders are eligible for the dividend

For computing the amount paid to preferred and common shareholders for year 2 first we have to determine the preference dividend which is shown below:

Preference dividend is

= Number of shares × dividend percentage × par value

= 11,900 shares × 5% × $10              

= $5,950

For two years it would be

= $5,950 × 2 years

= $11,900

And, the total cash dividend is paid in year 2 is $10,200

So, the preference shareholders would get only $10,200 and common stockholders gets $0