Question

The following information is provided for Bold Company for the year 2017:

• Preferred stock, 6%, $50 par value, 1,600 shares issued and outstanding
• Common stock, $100 par value, 2,600 shares issued and outstanding
• Dividends in arrears for three prior years (2014­­–2016)
• Total dividends declared and paid in 2017 were $56,000.

How much of the 2017 dividend payment was paid to the common stockholders assuming the preferred stock is noncumulative?

$51,200.

$19,200.

$36,800.

$4,800.

Answer 1

$51,200.

Working:

Dividends are paid to preferred stockholders before common stockholders.

There are two types of preferred stockholders:

Cumulative

and

Noncumulative

If in any year, dividends could not be paid to preferred stockholders, then such dividend is paid from any dividend of next year before any payment of dividend.

Thus type of preferred stock comes under cumulative preferred stock.

In second case, even if any dividend could not be paid in any year, then such dividend will not be paid from any future dividend.

This type of preferred stock comes under noncumulative preferred stock.

So, there is no relevance of unpaid past dividend to preferred stockholders in this question.

Total dividend

$ 56,000

Less dividend paid to preferred stockholders

1600*50*6%

$ 4,800

Dividend paid to common stockholders

$ 51,200