Question

Casio Company has 30,000 shares of $1 par common stock issued and outstanding. The company also has 5,000 shares of $100 par 5% cumulative preferred stock outstanding. The company did not pay the preferred dividends in 2017, 2018 and 2019. On December 1, 2020, the company’s board of directors declared that $200,000 will be paid as dividend on January 17, 2021. What amount of dividends would common stockholders earn? *

a) $200,000

b) $150,000

c) $125,000

d) $100,000

Answer 1

Mainly there are two types of shares which are preferred shares and common shares. Cumulative preferred shares are those shares which are entitled to get the dividend amount along with any arrear dividend in past years before common shareholders get. The common shareholders are not entitled to get any arrear dividends. All the dividends including the arrear dividend is first paid to cumulative preferred shares and if any balance is there, then paid to common shareholders.

In the above question,

Common stock = 30,000 shares x $ 1 per share.

Common stock = $ 30,000.

5% cumulative preference shares = 5,000 x $100

5% cumulative preference shares = $ 500,000

Annual fixed dividend to cumulative preference shares is 5 %.

Annual fixed dividend = 500,000 x 5%

Annual fixed dividend = $ 25,000.

So cumulative preference shareholders are entitled to get $ 25,000 per year.

It is given that, the cumulative preference shareholders are not paid dividend in 2017, 2018, and 2019.

Three years dividend = 25,000 x 3

Three years dividend = $ 75,000.

Here, cumulative preference shares didn't get three years arrear dividend totalling $ 75,000.

In 2020, company declared and paid $ 200,000.

So the cumulative preference shares will get $ 25,000 of fixed dividend in 2020 and three years dividend amounting to $ 75,000. So a total of $ 100,000 will be first paid to cumulative preference shareholders.

Balance dividend = 200,000 - 100,000

Balance dividend = $ 100,000.

So common shareholders will get balance $ 100,000 in 2020.

Hence, option D is the correct answer.

SUMMARY:

Cumulative preference shares will get $ 25,000 as fixed amount in 2020 and three years arrer dividend amounting to $ 75,000. So out of $ 200,000 the cumulative preference will first get $ 100,000 and balance $ 100,000 is given to common shareholders.

Hence, option D is the correct answer.