Question

Nathan's Athletic Apparel has 2,000 shares of 6%, $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 $25,000 in 2021.
Required:
Assuming the preferred stock is cumulative and noncumulative, how much of the $25,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021?

Answer 1

Answer:

Cumulative Noncumulative

Preferred Dividend 2021 $12,000 $12,000

Preferred Dividend in arrears for 2020

$12,000 $0

Remaining dividend for common Stock holders $1,000 $13,000

Explanation:

Calculation to determine how much of the $25,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021

First step is to calculate the Dividend to be paid to preferred stock holders

Dividend to be paid to preferred stock holders=(2000*$100)*6%)

Dividend to be paid to preferred stock holders=$12,000

Now let determine how much of the $25,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021

CUMULATIVE NONCUMULATIVE

Preferred Dividend 2021 $12,000 $12,000

Preferred Dividend in arrears for 2020

$12,000 $0

Remaining dividend for common Stock holders $1,000 $13,000

($25,000-$12,000+$12,000=$1,000)

($25,000-$12,000=$13,000)

Total Dividend $25,000 $25,000