Question

Shareholders' equity of Red Corporation includes $200,000 of $1 par common stock and $400,000 of 6% cumulative preferred stock as of January 1st, 2010. If the board of directors of Green declared cash dividends of $50,000 in 2011 after paying $20,000 cash dividends in 2010, what is the amount of dividends common shareholders will receive in 2011? [3 points]

a. $30,000
b. $50,000
c. $70,000
d. $80,000

Answer 1

To calculate the amount of dividends common shareholders will receive in 2011, we need to consider the cumulative preferred stock and the previous year's dividends. The amount of dividends common shareholders will receive in 2011 is $30,000.

Step-by-step explanation:

To calculate the amount of dividends common shareholders will receive in 2011, we need to understand the concept of cumulative preferred stock first. Cumulative preferred stock means that if the company fails to pay dividends in a certain year, those dividends will accumulate and must be paid in the future before dividends are paid to common shareholders.

In this case, the preferred stock has a cumulative feature and has accumulated $20,000 in dividends from 2010. So, in 2011, before any dividends are paid to common shareholders, $20,000 will first be paid to preferred shareholders to fulfill the previous year's unfulfilled dividend obligation. After that, the remaining amount of $30,000 ($50,000 - $20,000) will be available for common shareholders.

Therefore, the amount of dividends common shareholders will receive in 2011 is $30,000.