Question

Sheridan Company has 5600 shares of 6%, $50 par value, cumulative preferred stock and 112000 shares of $1 par value common stock outstanding at December 31, 2020, and December 31, 2019. The board of directors declared and paid a $12500 dividend in 2019. In 2020, $62500 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2020?

Answer 1

Dividend received in 2020 =$21,100

Step-by-step explanation:

Preference shares allows its investors to earn a fixed percentage of the nominal value of shares as dividend.

Dividend = Dividend rate × Nominal value

Dividend due to preferred stock = 6%× $50× 112,000 = $16,800

Balance to be carried forward = $16,800 - 12,500 = 4300

Preference dividend in 2020 = Arrears + Dividend due for December 2020

= 4300 + (6%× $50× 112,000)= $21,100

Dividend received in 2020 =$21,100

Note that the unpaid dividend of 2019 were added to the dividends due in 2020. Cumulative preference shares allow for arrears of unpaid dividends for prior years to be carried forward for settlement at the later years.