Question

Madison Co. paid dividends of $3,000; $6,000; and $10,000 during 2012, 2013 and 2014 respectively. The company had 500 shares of preferred stock outstanding with a $10 per share cumulative dividend. The amount of dividends received by the common shareholders during 2014 would be:

Answer 1

$4,000

Step-by-step explanation:

It is provided that preference shares are cumulative in nature, that means even if dividend is not paid in current year, the dividend get accumulated.

The net dividend payable to preference capital = 500 shares @ $10 each share = $5,000

Therefore, total dividend of preference shareholders for all the three years = $5,000
`*` 3 = $15,000

Total dividend paid till date = $3,000 + $6,000 + $10,000 = $19,000

Therefore, dividend to equity in 2014 = $19,000 - $15,000 = $4,000

Because even if dividend to preference in 2012 was $3,000, the remaining $2,000 would be carried forward.

And before any dividend to equity, first dividend shall be paid to preference and also no dues of preference dividend shall remain in balance.