A corporation has 15,000 shares of 10%, $50 par cumulative preferred stock outst

Question

A corporation has 15,000 shares of 10%, $50 par cumulative preferred stock outstanding and 25,000 shares of no-par common stock outstanding. Dividends of $37,500 are in arrears. At the end of the current year, the corporation declares a dividend of $120,000. What is the divided allocated between preferred and common shareholders?

a. The dividend is allocated $7,500 to preferred shareholders and $112,500 to common shareholders.

b. The dividend is allocated $75,000 to preferred shareholders and $45,000 to common shareholders.

c. The dividend is allocated $120,000 to preferred shareholders and $0 to common shareholders.

d. The dividend is allocated $112,500 to preferred shareholders and $7,500 to common shareholders.

Explanation / Answer

Answer: d. The dividend is allocated $112,500 to preferred shareholders and $7,500 to common shareholders.

Calculations: Preferred: $50 x 10% x 15,000 shares = $75,000 current year + $37,500 in arrears = $112,500

Common: $120,000 – $112,500 = $7,500

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