Question

1) XYZ Corporation has outstanding 1,000 shares of $100 par, 10% preferred stock, and 6,000 shares of no-par common stock. Stangeland Corp.'s balance sheets show these issues as follows: pfd: $100K common: $120K Stangeland Corporation paid out dividends for the last four years as follows: year A, $9,000 b 10,000 C 17,000 D 33000. if the preferred stock is cumulative and fully participating, the allocation of the year D dividends between preferred and common stock was

select one

A) $ 0 preferred , $33,000 common

B) $15000 P, $18000 Common

C none

D) $20455 P , $12545 common

E) $10000 P , $23000 C

Answer 1

Preferred Stock

These are one of the types of securities issued by a company in the market for raising the funds from public. The preferred stock are purchased by the investors who are interested in a fixed earnings every year.

The important feature of Preferred stock is that the investors will be paid dividend every year, and in case of loss, the cumulative amount of such dividend will be paid at the year in which profit is made.

The dividend are paid at a fixed percentage which are deicded at the time o f issue of preferred stock, hence it is very advisable to invest these type os stocks, as thery can earn a fixed income annually and there is no risk attached to it.

Only after the payment of preferred dividend, the balance on the payout will ony be paid to common stock, hence risk on the part of common stock is higher.

In the given case.,

The preferred stock = 1000shares * Face value of $ 100

Value of preferred stock = 1000*100= $ 1,00,000

Preferred dividend will be = $ 1,00,000*10/100 = $ 10,000. every year.

Payment of preferred dividednds in the following year as follows:-

Year	Profit	Preferred Dividend	Common stock dividend	Balance to be paid to preferred stock
A	$       9,000	$                     9,000	Nil	=10000-9000= $ 1,000.
B	$     10,000	$                    10,000	Nil	Nil
C	$     17,000	$10,000 of the current year + $ 1,000 (balance of A year) = $ 11,000	=$ 17,000 -(10,000+1,000) =$ 6,000.	Nil
D	$     33,000	$               10,000.00	$          23,000	Nil

Thus option E) $10000 P , $23000 C is he correct, other options are incorrect.