Hu Corp. had the following stock issued and outstanding at January 1, 2010: 50,0

Question

Hu Corp. had the following stock issued and outstanding at January 1, 2010: 50,000 shares of no-par common stock. 10,000 shares of $100 par. 3 percent, cumulative preferred stock. (Dividends are in arrears for one year, 2009.) On February 1, 2010, declared a $100,000 cash dividend to be paid March 31 to shareholders of record on March 10. Required: What amount of dividends will be paid to the preferred shareholders versus the common shareholders? (Amounts to be deducted should be indicated with minus sign. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Explanation / Answer

Total cash dividend to be paid = $100000

Dividend on preferred shares if in arrear has to be paid first. Therefore, arrear dividend on preferred stock for the year 2009 has to be paid first out of the total amount $100000.

Dividend in arrear = 3% * $1000000 = $30000

Remaining amount = $100000 - $30000 = $70000. This will be first distributed to shareholders of preferred shock and then to common shareholders.

Amount to be paid for preferred stock = 3% * $1000000 = $30000

Balance amount of $40000 ($70000 - $30000) will be distributed to common stockholders.

The final distribution is:

Arrear dividend for preferred stock = $30000

Current Preferred dividend = $30000

Dividend distributed to common stockholders = $40000

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