Question

Raphael Corporation’s balance sheet shows the following stockholders’ equity section. Preferred stock—5% cumulative, $___ par value, 1,000 shares authorized, issued, and outstanding $50,000 Common stock—$___ par value, 4,000 shares authorized, issued, and outstanding 80,000 Retained earnings 150,000 Total stockholders' equity $280,000 If two years’ preferred dividends are in arrears at the current date and the board of directors declares cash dividends of $11,500, compute the total amount paid to (a) preferred shareholders and (b) common shareholders.

Answer 1

To compute the amount paid to preferred shareholders, subtract the preferred dividends in arrears from the cash dividends. To compute the amount paid to common shareholders, subtract the amount paid to preferred shareholders from the total dividends declared.

Step-by-step explanation:

To compute the total amount paid to preferred shareholders, we need to first calculate the preferred dividends in arrears, which is the number of years in arrears multiplied by the preferred dividend rate and the par value of preferred stock:

Preferred dividends in arrears = 2 years x 5% x $50,000 = $5,000

Next, we subtract the preferred dividends in arrears from the cash dividends declared by the board of directors to find the total amount paid to preferred shareholders:

Total amount paid to preferred shareholders = Cash dividends - Preferred dividends in arrears = $11,500 - $5,000 = $6,500

To compute the total amount paid to common shareholders, we just subtract the amount paid to preferred shareholders from the total dividends declared:

Total amount paid to common shareholders = Cash dividends - Total amount paid to preferred shareholders = $11,500 - $6,500 = $5,000