Lopez Inc. has 1,000 shares of 6%, $50 par value, cumulative preferred stock and

Question

Lopez Inc. has 1,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 1999 and December 31, 2000. The board of directors declared and paid a $2,000 dividend in 1999. In 2000, $10,000 of dividends are declared and paid. What are the dividends received by preferred and common shareholders in 2000?

a. Preferred 6,000 Common 4,000

b. Preferred $5,000 Common $5,000

c. Preferred $4,000 Common $6,000

d. Preferred $3,000 Common $7,000

Explanation / Answer

1999:

Preferred dividend = 1,000 shares*$50 par value*6/100

= $3,000

But in 1999, total dividends declared and paid is only $2,000 that means there are arrears of $1,000 ($3,000 - $2,000) which will be collected in next year that is 2000 because the preference shares are cumulative in nature.

Preferred dividends for 2000 = 1,000 shares * $50 par value *6/100

= $3,000

Total preferred dividends = Last year arrears + Curren year's

= $1,000 + $3,000

= $4,0000

Dividends to common stockholders = Total dividends decalred and paid - Preferred dividends

= $10,000 - $4,000

= $6,000

Therefore, preferred dividends are $4,000 and common dividends are $6,000 so option C is correct.

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