Mega, Inc., has common and 6 percent preferred stock outstanding as follows. Preferred stock: 10,000 shares, $100 par value, cumulative Common stock: 50,000 shares, $50 par value The company declares a total dividend of $225,000. If the dividends on preferred stock are one year in arrears (in addition to the current year), how will the total dividend be divided between the common and preferred stock?

Preferred Dividend $120,000

Common stock dividend $105,000

Explanation:

Preferred stock is the type of stock which is given priority over common stock specially when dividend is declared. Dividend of preferred stock is predetermined and must be paid even there is a loss. The remainder dividend will be distributed between the common stockholders.

Preferred Stock = 10,000 share, $100 par @ 6%

Value of Preferred shares = 10,000 x $100 = $1,000,000

Dividend declared = $225,000

Preferred dividend = $1,000,000 x 6% = $60,000 per year

Total Preferred dividend = Current year dividend + One year arrears dividend

Total Preferred dividend = $60,000 + $60,000 = $120,000

Common stock dividend = Total dividend declares - Total preferred dividend

Common stock dividend = $225,000 - $120,000 = $105,000