Colson Inc. declared a $230,000 cash dividend. It currently has 12,000 shares of 5%, $100 par value cumulative preferred stock outstanding. Colson is one year in arrears on its preferred stock. How much cash will Colson distribute to the common stockholders?

Dividend to be distributed among common stock holders is $110000

Explanation:

The cumulative preferred stock is the stock which accumulates or accrues dividends in case the company is unable to pay or partially pay the dividends due on these stock in a year. The accumulated dividends on these stocks must be paid whenever the company declares dividend.

The dividend on preferred stock is always paid first and any remaining amount from the declared dividends are preferred stock dividend is paid is distributed among the common stockholders.

Total Preferred dividend per year = 12000 * 100 * 0.05 = $60000 per year

As preferred stock dividend is in arrears for one year, the company will pay the dividend in arrears and this year's dividend on preferred stock out of the declared dividend of $230000.

Total preferred stock dividend to be paid = 60000 + 60000 = $120000

Dividend distributed among common stock holders = 230000 - 120000 = $110000