Question

Belmont, Inc., has outstanding 10,000 shares of $200 par value, 7% nonparticipating, cumulative preferred stock and 10,000 shares of $40 par value common stock. If the dividend on preferred stock is one year in arrears, and the total cash dividend declared this year is $288,000, then the total amounts distributed to preferred and common stockholders, respectively, are:_____

a. $280,000 and $8,000
b. $84,000 and $204,000
c. $240,000 and $48,000
d. $108,000 and $180,000

Answer 1

Answer: a. $280,000 and $8,000

Step-by-step explanation:

The Preference shares are cumulative which means that if they are not paid in one year, they will accrue till they can be paid. Preference dividends in this scenario will therefore be paid for 2 years.

Preference dividend = 10,000 * 200 * 7%

= $140,000

Total Preference dividends = 140,000 * 2 years = $280,000

Dividends remaining for common shareholders = 288,000 - 280,000

= $8,000