Question

Ultimate Sportswear has $180,000 of 7% noncumulative, nonparticipating, preferred stock outstanding. Ultimate Sportswear also has $580,000 of common stock outstanding. In the company's first year of operation, no dividends were paid. During the second year, the company paid cash dividends of $38,000. This dividend should be distributed as follows:

a. $0 preferred; $38,000 common.
b. $9,500 preferred; $28,500 common.
c. $20,000 preferred; $18,000 common.
d. $12,600 preferred; $25,400 common.
e. $19,000 preferred; $19,000 common.

Answer 1

Option (D) is correct.

Step-by-step explanation:

Given that,

Preferred stock = $180,000

Dividend rate = 7%

During the second year, the company paid cash dividends = $38,000

Preferred stock dividend:

= Preferred stock × Dividend rate

= $180,000 × 7%

= $12,600

Common stock dividend:

= Dividend paid - Preferred stock dividend

= $38,000 - $12,600

= $25,400

Therefore, this dividend should be distributed as follows:

$12,600 preferred; $25,400 common.