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Haas Enterprise Inc. has outstanding 30,000 shares of $50 par value, 6% preferred stock and 70,000 shares of $1 par value common stock. During its first three years in business, it declared and paid no cash dividends in the first year, $310,000 in the second year, and $90,000 in the third year. (a) If the preferred stock is cumulative, determine the total amount of cash dividends paid to each class of stock in each of the three years.

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Answer:

Year 1

Preferred stock $0

Common stock $0

Year 2:

preferred stock  $180,000

common stock $130,000

Year 3:

Preferred stock $90,0000

Common stock nil

Explanation:

The fact that preferred stock is cumulative means that dividends left unpaid in years when no dividends were declared would be paid in subsequent years.

annual preferred stock dividends=30,000*$50*6%=$90,000

No dividends  were declared in year 1, hence no dividends were paid

In year 2  $310,000 of dividends were declared

Dividends paid to preferred stock in year 2=$90,000+$90,000=$180,000(for both first year and second year)

common stock dividends in year 2=$310,000-$180,000=$130,000

In year 3 the dividends of $90,000 declared would be paid to preferred stock

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