Question

The shareholders’ equity of Tru Corporation includes $620,000 of $1 par common stock and $1,220,000 par of 7% cumulative preferred stock. The board of directors of Tru declared cash dividends of $152,000 in 2018 after paying $62,000 cash dividends in each of 2017 and 2016.

Required:
What is the amount of dividends common shareholders will receive in 2018?

Answer 1

The amount of dividends common shareholders will receive in 2018 = $19,800

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Computation

**The dividends for cumulative preferred stock do accumulate if they are not paid and consequentially go into arrears

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Working note 1 - Computation of dividend per year to be payable to preferred shareholders
a. Par value of the preferred stock	$1,220,000
b. Percentage of preferred dividend	7%
Preferred dividend per year    [a x b]	$85,400

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Computation of cash dividend to be payable to common shareholder in the year 2018
Year 2016
a. Preferred dividend payable for the year 2016          [Refer working note 1]	$85,400
b. Cash dividend distributed to preferred stockholders in 2016	$62,000
c. Dividend in arrears for the year 2016 [a - b]	$23,400
Year 2017
d. Preferred dividend payable for the year 2017      [Refer working note 1]	$85,400
e. Total preferred dividend (inclusive of dividend in arrear) to be payable in the year 2017       [c + d]	$108,800
f. Cash dividend distributed to preferred stockholders in 2017	$62,000
g. Dividend in arrears for the year 2017 [e - f]	$46,800
Year 2018
h. Preferred dividend payable for the year 2018      [Refer working note 1]	$85,400
i. Total preferred dividend (inclusive of dividend in arrear from the year 2017) to be payable in the year 2018       [g + h]]	$132,200
j. Cash dividend declared in 2018	$152,000
k. Cash dividend to be distributed to preferred stockholders in 2018      (i)	$132,200
l. Remaining cash dividend (after paying preferred shareholders) to be distributable to common shareholders   [j - k]	$19,800

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Alternative answer
Computation of cash dividend to be payable to common shareholder in the year 2018
a. Cash dividend paid in the year 2016	$62,000
b. Cash dividend paid in the year 2017	$62,000
c. Cash dividend paid in the year 2018	$152,000
d. Total cash dividend     [a + b+ c]		$276,000
Less:
e. Preferred dividend for the year 2016	$85,400
f. Preferred dividend for the year 2017	$85,400
g. Preferred dividend for the year 2018	$85,400
h. Total Preferred dividend     [e + f +g]		$256,200
Cash dividend remained to be payable to common shareholders		$19,800