Question

The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2020. All remaining shares are common stock. The company was not able to pay dividends in 2020, but plans to pay dividends of $18,000 in 2021.

1. Assuming the preferred stock is cumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021?
Multiple ChoiceA. $18,000 to preferred stockholders and $0 to common stockholders.B. $6,000 to preferred stockholders and $12,000 to common stockholders.C. $9,000 to preferred stockholders and $9,000 to common stockholders.D. $12,000 to preferred stockholders and $6,000 to common stockholders.

Answer 1

Dividend paid to preferred stockholders in 20121

= 6% x $100 x 1,000 x 2 year

= $12,000

Dividend paid to common stockholders

= Total dividend - Preferred dividend

= $18,000 - $12,000

= $6,000

The correct answer is D

Step-by-step explanation:

The dividend paid to preferred stockholders is calculated as dividend rate multiplied by par value of the preferred stock multiplied by number of preferred stock outstanding multiplied by 2 years (2020 - 2021).

The dividend paid to common stockholders is the difference between total dividend and preferred dividend.