The company had 1,600 shares of 3.0%, $100 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

The question is incomplete! The complete question along with answer and explanation is provided below.

Question:

Curtain Co. paid dividends of $4,000; $5,000; and $8,000 during Year 1, Year 2, and Year 3 respectively. The company had 1,600 shares of 3.0%, $100 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

A. $4800

B. $1000

C. $2600

D. $800

Answer:

C. $2600

Explanation:

Paid dividend in year 1: $4,000

Paid dividend in year 2: $5,000

Paid dividend in year 3: $8,000

First we have to calculate the annual preferred dividend.

Annual preferred dividend = $100*1,600*0.03

Annual preferred dividend = $4,800

Year 1:

dividends in arrears = preferred dividend - paid dividend

dividends in arrears = $4,800 - $4,000

dividends in arrears = $800

Year 2:

dividends in arrears = previous arrears + preferred dividend - paid dividend

dividends in arrears = $800 + $4,800 - $5,000

dividends in arrears = $600

Year 3:

dividends in arrears = $600 + $4,800 = $5,400.

paid dividend - dividends in arrears = $8000 - $5,400 = $2,600

Hence, common shareholders received $2,600

C. $2600

Explanation:

First, the complete question is as follows:

Curtain Co. paid dividends of $4,000; $5,000; and $8,000 during Year 1, Year 2, and Year 3, respectively. The company had 1,600 shares of 3.0%, $100 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

A. $4800

B. $1000

C. $2600

D. $800

Solution

First, what is the yearly dividend for the preferred stock

= (The Number of shares x Par value) x 3%

= (1600 shares x $100) x 0.03

= $4,800

Use this value to determine the schedule of Preferrence dividend as follows:

Year 1: Preferred dividend = $4,000,

Preferred dividend in arrears for year 1 = Yearly dividend - paid dividend in year 1

= $4,800 - $4,000 = $800

Year 2: Preferred dividend = $5000

Preferred dividend in arrears for year 2 = $4,400 + $800 - $5,000 = $600

year 3: Preferred Dividend = Yearly dividend + dividend in arrears from year 2

= $600 + $4,800 = $5,400

Therefore, the dividends available to common stockholders = $8,000 - $5,400 = $2,600