Final answer:
Since Red Corporation's cumulative preferred stock requires unpaid dividends to be paid before common shareholders, and the dividend declared in 2011 does not cover the full amount owed to preferred shareholders, common shareholders will receive $0 in dividends for 2011.
Step-by-step explanation:
The question asks about the amount of dividends common shareholders will receive from Red Corporation in 2011, given that there's $200,000 of $1 par common stock and $400,000 of 6% cumulative preferred stock. First, we must acknowledge that the preferred shareholders are entitled to their dividends before any common shareholders. The 6% cumulative preferred stock yields a 6% dividend annually. So, for $400,000 of preferred stock, an annual dividend of $24,000 (6% of $400,000) is expected. In 2009, $40,000 in dividends was distributed and in 2010, it was $20,000. Since the preferred stock is cumulative, any unpaid dividends from previous years must be paid. The cumulative unpaid dividends before 2011 amount to $28,000 ($24,000 for 2009 plus $24,000 for 2010 minus $20,000 paid in 2010). Thus, in 2011 the preferred stockholders would need to be paid $52,000 in total ($28,000 in arrears and the current year's $24,000) before common stockholders receive anything. Considering the $50,000 declared for 2011, the entire amount will go to satisfying the $52,000 requirement of preferred shareholders. Unfortunately, since this is less than the cumulative preferred dividends required, common shareholders will receive an amount of $0 in 2011.