Xtreme Sports has $150,000 of 8% noncumulative, nonparticipating, preferred stoc

Question

Xtreme Sports has $150,000 of 8% noncumulative, nonparticipating, preferred stock outstanding. Xtreme Sports also has $550,000 of common stock outstanding. In the company's first year of operation, no dividends were paid. During the second year, Xtreme Sports paid cash dividends of $35,000. This dividend should be distributed as follows:

$19,000 preferred; $16,000 common.
$12,000 preferred; $23,000 common.
$0 preferred; $35,000 common.
$17,500 preferred; $17,500 common.
$8,750 preferred; $26,250 common.

Explanation / Answer

For noncumulative preferred stock, company no obligation to repay any unpaid dividend. However, at the second year, company need to pay preferred stockholders before common stockholders. Year 2, Preferred stockholder receive $150,000*8% = 12,000 Common stockholder receive $35000 - $12000 = $23,000

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