Question

The shareholders' equity of Red Corporation includes $230,000 of $1 par common stock and $430,000 par of 7% cumulative preferred stock. The board of directors of Red declared cash dividends of $53,000 in 2021 after paying $23,000 cash dividends in 2020 and $43,000 in 2019. What is the amount of dividends common shareholders will receive in 2021?

Answer 1

$15,800

Step-by-step explanation:

Preferred stockholders has an advantage that they are paid first when there is any dividend is announced. The residual dividend will be divided into the common stockholders. Any prior years due dividend and current years dividend associated with preferred share will be paid first.

Dividend on preferred shares = $430,000 x 7% = $30,100 per year

2019

Dividend Declared = $43,000

Dividend to common shareholders = $43,000 - $30,100 = $12,900

2020

Dividend Declared = $23,000

Residual Preferred Dividend = $30,100 - $23,000 = $7,100

It will be carried forward to next year and will be deducted form future dividend

2021

Dividend Declared = $53,000

Dividend to common shareholders = $53,000 - $30,100 -7,100 = $15,800