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24 August, 14:05

Watson, Inc. has 10,000 shares of 6%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2014. There were no dividends declared in 2012. The board of directors declares and pays a $100,000 dividend in 2013 and in 2014. What is the amount of dividends received by the common stockholders in 2014? a. $20,000. b. $60,000. c. $100,000. d. $0.

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  1. 24 August, 14:14
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    a. $20,000

    Explanation:

    As for the information provided,

    Total shares outstanding preference cumulative in nature = 6% 10,000 shares of $100 each = 6% $1,000,000

    Dividend for each year = $60,000

    Equity = 20,000 shares of $1 each = $20,000

    Since no dividend is paid in 2012, the preference dividend will be in arrears for 2012 = $60,000

    Dividend in 2013 = Dividend to preference for 2012, and for 2013

    = $60,000 + $60,000 = $120,000

    Since dividend paid = $100,000

    $20,000 of preference dividend for 2013 stands in arrears.

    Dividend in 2014 = $100,000

    This shall be first used to pay dividend in arrears = $100,000 - $20,000 = $80,000

    From this first dividend to preference for 2014 will be paid = $80,000 - $60,000 = $20,000

    Now this $20,000 will be paid to equity as dividend.
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