PROBLEM 10 8 points) Stockholders\' Equity of Walland Corporation showed the fol

Question

PROBLEM 10 8 points) Stockholders' Equity of Walland Corporation showed the following in its Stockholders' Equity section of the balance sheet: Preferred stock, 9% cumulative, $50 par, 40,000 shares authorized, issued, and outstanding Common stock, $5 par, 400,000 shares authorized, issued, and outstanding $2,000,000 $2,000,000 Assume that all the stock was issued on January 1 and that no dividends were paid during the first two years of operation. During the third year, Walland paid total cash dividends of $718,000. Compute the amount of cash dividends paid during the third year to both the Preferred shareholders and the Common Stock shareholders.

Explanation / Answer

The preferred stock is cumulative, this implies that the dividend unpaid in the past years continues to accrue and shall be paid first before any other dividend payment is made to other stock holders. Therefore $718,000 of dividend paid in the third year includes preference dividend for the first two years as well.

Dividend on Preferene Stock for 3 years = 2,000,000*0.09*3 = $540,000

Dividend on common stock = 718,000 - 540,000 = $178,000

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