Question

Berman Inc. has 6,000 shares of 8%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2013, and December 31, 2014. The board of directors declared and paid an $18,000 dividend in 2013. In 2014, $72,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2014?a. $42,000.b. $36,000.c. $30,000.d. $24,000.

Answer 1

Answer:

a. $42,000

Explanation:

As provided the preference shares are cumulative in nature.

Which means even if the eligible dividend is not paid to them then the dividend will be carried forward.

Also, there is a standard rule, that first all the preference dividends, that related to current year, and related to any arrears shall be paid first in order to pay any dividend to equity.

In the given instance,

Dividend to preference = $50 $\times$ 6,000 $\times$ 8% = $24,000

Dividend in 2013 = $18,000

That means this entirely is paid to preference shareholders and, after payment also, dividend in arrears = $24,000 - $18,000 = $6,000

In year 2014 the dividend paid in total = $72,000

Which shall be paid firstly to preference in arrears, then current year dividend to preference and then the remaining to equity.

Therefore, from $72,000 first $6,000 will be paid to preference for year 2013,

Then, $24,000 to preference for year 2014.

Then, remaining $72,000 - $6,000 - $24,000 = $42,000 to equity share holders.