Vaughn, Inc. has 2400 shares of 4%, $50 par value, cumulative preferred stock and 48000 shares of $1 par value common stock outstanding at December 31, 2019, and December 31, 2018. The board of directors declared and paid a $3800 dividend in 2019. In 2020, $17400 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2020

Answer: Preferred Shareholders will receive $5,800 and Common Shareholders will receive $11,400 in dividends.

Explanation:

With Cumulative Preferred Shares, their dividends must always be paid and if they cannot be paid, they are accrued until such a time as they can be paid.

Vaughn, Inc. has 2400 shares of 4%, $50 par value, cumulative preferred stock which means that the dividends due on them are,

= 2,400 * 50 * 4%

= $4,800

The board of directors declared and paid a $3,800 dividend in 2019 which is $1,000 less than the total amount of dividends to be paid to the preferred shareholders.

That means that the entire $3,800 in 2019 went to Preferred Shareholders and they are infact still owed $1,000.

In 2020 therefore their dividend payment should be,

= 4,800 + 1,000

= $5,800

Common Shareholders will receive,

= 17,400 - 5,800

= $11,600

Preferred Shareholders will receive $5,800 and Common Shareholders will receive $11,400 in dividends in 2020.