Question

Halverstein Company's outstanding stock consists of 7,000 shares of cumulative 5% preferred stock with a $10 par value and 3,000 shares of common stock with a $1 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends.Dividends Declared & PaidYear 1 $ 0Year 2 $ 6,000Year 3 $ 32,000The amount of dividends paid to preferred and common shareholders in Year 2 is:

Answer 1

Preferred shareholders $6,000

Common shareholders = $0

Step-by-step explanation:

Preference Stock holders have preference over Common stock holders when it comes to payment of dividends.

Also if the preference stocks are cumulative, previous dividends in arrears have to be settled before any distributions are made to common stockholders.

Preference Stock dividend per year is constant and is calculated as follows.

Preference Stock dividend = 7,000 × $10 × 5%

= $3,500

Year 1

No dividend was declared and paid.

Preference Stock dividend in arrears is $3,500.

No dividend is available for Common stockholders

Year 2

Dividend declared and paid amount to $6,000

Preference Stock dividend in arrears from first year to be paid is $3,500.

Preference Stock dividend in current year to be paid is $3,500.

This leaves an arrear of $1,000 to be paid to Preference Stock holders after the payments.

Calculation = $6,000 - $3,500 (Year 1) - $3,500 (Year 2) = $1,000 (Arrears)

No distributions are available for Common stockholders.

Conclusion :

The amount of dividends paid to preferred and common shareholders in Year 2 is:

Preferred shareholders $6,000

Common shareholders = $0