[Allison]

At December 31, Year 1 and Year 2, Carr Corp. had outstanding 4,000 shares of $100 par value 6%
cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, Year 1,
dividends in arrears on the preferred stock were $12,000. Cash dividends declared in Year 2 totaled
$44,000. Of the $44,000, what amounts were payable on each class of stock?
A. $44,000 $0
B. $36,000 $8,000
C. $32,000 $12,000
D. $24,000 $20,000
Answer is B
Why all left $8,000 will be given to CS? Why we don’t multiple 6%? Thanks,

[AusNat]

The problem specifies that the preferred stock is cumulative, so the dividends in arrears are paid to the preferred stock first. Then the remainder is used first to pay the current year preferred dividends, and then the remainder goes to common stock shareholders.

$44,000 total declared for Y2
$12,000 allocated first to the preferred shareholders to pay the div in arrears
$32,000 remaining [44-12] to be allocated first to preferred SH and then to common SH
$24,000 of that goes to preferred SH for current year dividends [$32,000 x 4000 shares x $100 par x 6% = $24,000]

At this point, a total of $36,000 is going to preferred SH [$12,000+$24,000]. We've taken care of the prior amount owed (the dividends in arrears) and the current year preferred dividends. So the remainder of the $44,000 declared dividends goes to common stock SH. That's $8,000 [$44,000-36,000].

IF the preferred stock was participating preferred stock, then that $8,000 remainder would be allocated between preferred and common stock (though in this case it would actually still all go to common stock based on how these specific numbers work out). This problem doesn't indicate that the preferred stock is participating, so I'd assume nonparticipating -> take care of PY preferred dividends, CY preferred dividends, and then the rest to common with no further allocation. I'm guessing that's where you're confused.

[Allison]

Thank you so much @AusNat! I think the ‘participating' is the confusing part for me, now I get it!

By the way, what do you mean ‘though in this case it would actually still all go to common stock based on how these specific numbers work out'? I still didn't get what you meant.

Many thanks!

[Author]

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