Question

Blowing Rock Inc. has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 30,000 shares of $1 par value common stock outstanding at December 31, 2017. There were no dividends declared in 2015. The board of directors declares and pays a $45,000 dividend in 2016 and in 2017. What is the amount of dividends received by the common stockholders in 2017?

Answer 1

Equity dividend for 2017 = $15,000

No other equity dividend is paid.

Step-by-step explanation:

As for the information provided,

Preference shares when cumulative in nature holds a right of dividend, even for the year when no dividends are declared as the amount accumulates and stands as a liability.

In the given instance preference dividend for each year = $500,000
`*` 5% = $25,000

Therefore, preference dividend for each year = $25,000

Now, it will be paid prior to any dividend to equity.

for the year 2016

Dividend declared = $45,000

From this firstly preference dividend for 2015 will be paid = $45,000 - $25,000 = $20,000

Out of this again preference dividend for 2016 will be paid = $20,000 - $25,000 = - $5,000

Now this 5,000 will stand outstanding in the year 2017

Dividend of 2017 = $45,000

Payment to preference = $5,000 arrears + $25,000 for current year = $30,000

Balance for equity = $45,000 - $30,000 = $15,000