Question

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Raphael Corporation's balance sheet shows the following stockholders' equity section.
Preferred stock-5% cumulative, $ par value, 1,000 shares authorized, issued, and outstanding
Common stock-$ par value, 4,000 shares authorized, issued, and outstanding
Retained earnings
Total stockholders' equity
$ 50,000
80,000
150,000
$ 280,000
2. If two years' preferred dividends are in arrears at the current date and the board of directors declares cash dividends of $11,500,
compute the total amount paid to (a) preferred shareholders and (b) common shareholders.
Total amount paid to the preferred shareholders
Total amount paid to the common shareholders

Answer 1

Preferred shareholders are paid $7,500, which includes $5,000 in arrears and $2,500 current year dividend; common shareholders receive the remaining $4,000 of the declared dividends.

Step-by-step explanation:

The student's question relates to the allocation of dividends among preferred and common shareholders in the context of a corporation's balance sheet. When a corporation declares a cash dividend, preferred shareholders have priority in the payment of dividends, particularly when the preferred stock is cumulative. According to the information provided, Raphael Corporation has 1,000 shares of 5% cumulative preferred stock with $50 par value, meaning each share is entitled to an annual dividend of $2.50 (5% of $50). The dividends in arrears for two years would be $5,000 (1,000 shares x $2.50 x 2 years). Once preferred shareholders are paid this amount, the remaining declared amount of $11,500 would then be distributed among the common shareholders.

Computing the total amount paid to each type of shareholder, the calculation proceeds as follows:

1. Total arrears to be paid to preferred shareholders: $5,000 (for two years).
2. Current year preferred dividend: $2,500 (1,000 shares x $2.50).
3. Total owed to preferred shareholders: $7,500 ($5,000 + $2,500).
4. Therefore, the remaining dividend for common shareholders will be: $4,000 ($11,500 - $7,500).

In summary, the total amount paid to preferred shareholders is $7,500, and the total amount paid to common shareholders is $4,000.