Question

Rachel's Designs has 1,800 shares of 6%, $50 par value cumulative preferred stock issued at the beginning of 2019. All remaining shares are common stock. Due to cash flow difficulties, the company was not able to pay dividends in 2019 or 2020. The company plans to pay total dividends of $18,000 in 2021. How much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders

Answer 1

Preferred dividend in arrears = $10,800

Preferred dividend for 2021 = $5,400

Remaining dividends to common stockholders = 1,800

Step-by-step explanation:

The computation of preferred stockholders and common stockholders is shown below:-

Preferred dividend in arrears for 2019 and 2020 $10,800

(1,800 × $50 × 6% × 2)

Preferred dividend for 2021 $5,400

(1,800 × $50 × 6%)

Remaining dividends to common stockholders 1,800

Total dividends $18,000

Therefore in every year Cumulative dividend will arise whether paid or not.

All dividend should be paid to preferred stock, if something is left will be paid to common stockholders.

Answer 2

Dividend to Preferred Stockholder = $16,200

Dividend to Preferred Stockholder = $1,800

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.

As per given data

Preferred stock value = 1,800 x $50 = $90,000

Dividend on preferred shares = $90,000 x 5% = $5,400 per year

As in 2019 and 2020 no dividend was paid so $10,800 is due in respect of preferred dividend.

2021

Total preferred dividend = Preferred Dividend arrears + Current year preferred dividend = $10,800 + $5,400 = $16,200

Dividend declared = $18,000

Dividend Payment to common stockholders = Dividend Declared - Total due preferred dividend = $18,000 - $1,6200 = $1,800

Dividend of $16,200 will be paid to preferred stockholders and dividend of $1,800 for common stockholders in 2021.