The company had 1,600 shares of 3.0%, $100 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

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Question:

Curtain Co. paid dividends of $4,000; $5,000; and $8,000 during Year 1, Year 2, and Year 3 respectively. The company had 1,600 shares of 3.0%, $100 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

A. $4800

B. $1000

C. $2600

D. $800

C. $2600

Explanation:

Paid dividend in year 1: $4,000

Paid dividend in year 2: $5,000

Paid dividend in year 3: $8,000

First we have to calculate the annual preferred dividend.

Annual preferred dividend = $100*1,600*0.03

Annual preferred dividend = $4,800

Year 1:

dividends in arrears = preferred dividend - paid dividend

dividends in arrears = $4,800 - $4,000

dividends in arrears = $800

Year 2:

dividends in arrears = previous arrears + preferred dividend - paid dividend

dividends in arrears = $800 + $4,800 - $5,000

dividends in arrears = $600

Year 3:

dividends in arrears =  $600 + $4,800  = $5,400.

paid dividend - dividends in arrears = $8000 - $5,400 = $2,600

Hence, common shareholders received $2,600

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