Question

The shareholders' equity of Red Corporation includes $200,000 of $1 par common stock and $400,000 par of 6% cumulative preferred stock.

The board of directors of Red declared cash dividends of $50,000 in 2021 after paying $20,000 cash dividends in 2020 and $40,000 in 2019.

What is the amount of dividends common shareholders will receive in 2021?

a. $18,000.
b. $22,000.
c. $26,000.

Answer 1

The amount of dividends common shareholders will receive in 2021 is $10,000.

Step-by-step explanation:

The amount of dividends common shareholders will receive in 2021 can be calculated by subtracting the dividends paid to preferred shareholders from the total dividends declared by the board of directors. In this case, the dividends paid to preferred shareholders is $40,000 (cumulative preferred stock at 6% par of $400,000), which leaves $10,000 ($50,000 - $40,000) for common shareholders. Therefore, the amount of dividends common shareholders will receive in 2021 is $10,000.