Question

Sweet Company’s outstanding stock consists of 1,200 shares of noncumulative 4% preferred stock with a $100 par value and 10,200 shares of common stock with a $10 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends.

	Dividend Declared
year 1	$	2,200
year 2	$	6,400
year 3	$	33,000

The total amount of dividends paid to preferred and common shareholders over the three-year period is:

Multiple Choice

$14,400 preferred; $27,200 common.

$11,200 preferred; $30,400 common.

$9,600 preferred; $32,000 common.

$4,800 preferred; $36,800 common.

$11,800 preferred; $29,800 common.

Halverstein Company's outstanding stock consists of 11,900 shares of cumulative 5% preferred stock with a $10 par value and 5,100 shares of common stock with a $1 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends.

	Dividend Declared
Year 1	$	0
Year 2	$	10,200
Year 3	$	43,000

The amount of dividends paid to preferred and common shareholders in Year 2 is:

Multiple Choice

$5,100 preferred; $5,100 common.

$0 preferred; $10,200common.

$5,950 preferred; $4,250 common.

$10,200 preferred; $0 common.

$7,140 preferred; $3,060 common.

Answer 1

1.

Total value of the preferred shares = 1,200 x $100 = $120,000

Annual preferred dividend = $120,000 x 4% = $4,800

Until $4,800 is not paid in dividends to the preferred shareholders, no dividends will be paid to the common stockholders. Also, the preferred stock is non-cumulative. That means if no preferred dividends are paid in any year or preferred dividends of less than $4,800 is paid in any year, the balance of the preferred dividends will not be carried to next year.

Therefore,

Preferred dividends paid = $2,200 + $4,800 + $4,800 = $11,800

Common dividends paid = ($2,200 + $6,400 + $33,000) - $11,800 = $29,800

Thus,

The correct answer is $11,800 preferred; $29,800 common.

2.

Total value of the preferred shares = 11,900 x $10 = $119,000

Annual preferred dividend = $119,000 x 5% = $5,950

Until $5,950 is not paid in dividends to the preferred shareholders, no dividends will be paid to the common stockholders. Also, the preferred stock is cumulative. That means if no preferred dividends are paid in any year or preferred dividends of less than $5,950 is paid in any year, the balance of the preferred dividends will be carried to next year.

Therefore,

Preferred dividends paid in year 2 = $10,200

Common dividends paid = $0

Thus,

The correct answer is $10,200 preferred; $0 common.