Question

DHM declares a Tk. 60,000 cash dividend on December 31, 2017. The required annual dividend on preferred stock is Tk. 10,000. Determine the allocation of the dividend to preferred and common stockholders, assuming the preferred stock is cumulative and dividends are 1 year in arrears.

A) Preferred stock: Tk. 10,000; Common stock: Tk. 50,000.
B) Preferred stock: Tk. 60,000; Common stock: Tk. 0.
C) Preferred stock: Tk. 0; Common stock: Tk. 60,000.
D) Preferred stock: Tk. 20,000; Common stock: Tk. 40,000.

Answer 1

The correct allocation of the Tk. 60,000 cash dividend with cumulative preferred stock one year in arrears would be Preferred stock: Tk. 20,000 and Common stock: Tk. 40,000. Hence, the correct answer is option (D).

Step-by-step explanation:

When DHM declares a Tk. 60,000 cash dividend and has cumulative preferred stock with dividends 1 year in arrears, we must first satisfy the arrears on the preferred stock before any dividends can be paid to common stockholders.

In this case, the required annual dividend on preferred stock is Tk. 10,000. Since the preferred stock is cumulative and there is one year of unpaid dividends, we must allocate Tk. 10,000 for the current year and an additional Tk. 10,000 for the arrears, totaling Tk. 20,000 to preferred stockholders.

The remaining Tk. 40,000 (60,000 - 20,000) is then allocated to the common stockholders.

Therefore, the correct allocation of the dividend would be Preferred stock: Tk. 20,000; Common stock: Tk. 40,000.