Corrao Foods Corporation has 8,000 shares of 6 %, $ 20 par value, cumulative preferred stock and 150,000 shares of $1 par value common stock outstanding at December 31, 2019 and December 31, 2020. In 2019, a $ 3,000 dividend was declared and paid. In 2020, $ 32,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2020 (assuming no dividends in arrears prior to 2019) ?

The answer is $16,200

Explanation:

Preferred stock holders has the right to receive dividend over common stock holders.

Thus, once there is any dividend paid-own, the dividend will be allocated to preferred stock holder first before any left-over amount is allocated among common shareholders.

Each year, preferred stock holders will receive the amount of dividend calculated as:

Par value x dividend rate x number of preferred shares outstanding = 20 x 6% x 8,000 = 9,600.

As in 2019, there are no dividends in arrears prior to 2019 and dividend payment is only $3,000; $6,600 dividend payment of 2019 is still owed to preferred shareholders.

In 2020, Dividends to preferred shareholders is still $9,600, yet they will receive the amount owed to them since 2019 of $6,600, so the total dividend amount receipt is $16,200 (that is, $9,600 + $6,600)

What are the dividends received by the preferred stockholders in 2020?

$ 16.200 Preferred Stockholers

Explanation:

Cash Dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends

Preferred Stock: The stocks that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common sotckholders is referred as preferred stock holders.

It means that if the previous year was not enough money to paid preferred dividends, then the difference, between what was paid and what are the preferred dividends, accumulates to the following year.

Total Dividends to Preferred Stockholders

8.000 Shares

6,0%

$20 Par Value

Total Preferred Dividends: 8,000 * 6% * $20 = $ 9.600

Preferred dividends for preferred stock.

$ 9.600

Total Dividends to be paid by the company each year

2019 2020

$ 3.000 $ 32.000 Dividend declared and paid.

$ 3.000 $ 16.200 Dividends of Preferred Stockholders ($9,600+

-$ 6.600 (3,000 - 9,600)

(Dividends to be paid next year because the dividends of paid in 2019 was not enough.)

$ 16.200 = => $9,600 (current year 2020) + $6,600 (arrears of the previous year)