Question

Fargo company's outstanding stock consists of 400 shares of noncumulative 5% preferred stock with a $10 par value and 3,000 shares of common stock with a $1 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends

Year 1 = $20,000
Year 2 = $6,000
Year 3 = $32,000
The total amount of dividends paid to preferred and common shareholders in year 1 is

a. $200 preferred & $19,800 common

b. $4,000 preferred & $16,000 common

c. $17,000 preferred & $3,000 common

d. $10,000 preferred & $10,000 common

Answer 1

The total amount of dividends paid to preferred and common shareholders in year 1 is a. $200 preferred and $19,800 common.

Step-by-step explanation:

To calculate the dividends paid to preferred and common shareholders in each year, we need to consider the preferred stock dividends and the remaining amount for common stock.

Preferred stock dividends are calculated as follows:

Preferred Dividend = (Number of Preferred Shares) x (Preferred Dividend Rate) x (Par Value per Share)

For Year 1:

Preferred Dividend = 400 shares x 5% x $10 = $2,000

The remaining amount after paying the preferred dividend is the common stock dividend:

Common Dividend = Total Dividends - Preferred Dividend

Common Dividend = $20,000 - $2,000 = $18,000

So, the dividends paid to preferred and common shareholders in Year 1 are:

Preferred: $2,000

Common: $18,000

Therefore, the correct option is: a. $200 preferred & $19,800 common