Question

Health & Wellness Corporation has had 7,500 shares of $3.00 cumulative preferred shares outstanding as well as 28,000 common shares issued at $10 outstanding since it was incorporated. During the first, second, and third years of operations, $15,000, $18,000, and $50,000 in dividends, respectively, were paid. The dividends paid to the common shareholders of Health & Wellness Corporation in year three amounted to:

a) $0
b) $15,500
c) cannot be determined from the given information
d) $27,500

Answer 1

In year three, the dividends paid to the common shareholders of Health & Wellness Corporation amounted to $15,500 after accounting for cumulative preferred dividends.

Step-by-step explanation:

The dividends paid to the common shareholders of Health & Wellness Corporation in year three amounted to $27,500. To calculate this, we must first ensure that the preferred shareholders receive their cumulative dividends. Health & Wellness has 7,500 shares of $3.00 cumulative preferred shares, which equates to a total preferred dividend of $22,500 per year ($3.00 * 7,500 shares). Over three years, this totals $67,500. The company paid $15,000, $18,000, and $50,000 in dividends for the first, second, and third years respectively. By the end of the second year, preferred shareholders should have received $45,000 ($22,500 for each year) but only received $15,000 + $18,000 = $33,000, leaving an arrears of $12,000. Therefore, in the third year, all $22,500 in dividends for that year plus the $12,000 in arrears must be paid to preferred shareholders before common shareholders receive anything. This totals $34,500 ($22,500 + $12,000) which must be paid to preferred shareholders in the third year. Since $50,000 was paid in total dividends during the third year, subtracting the amount paid to preferred shareholders ($34,500) leaves $15,500 ($50,000 - $34,500) to be paid to the common shareholders. Hence, the correct answer is b) $15,500.