Has outstanding 600,000 shares of $2 par common stock and 120,000 shares of no-par 6% preferred stock with a stated value of $5. Dividends have been paid in every year except the past two years and the current year. Assuming that $270,000 is distributed, and the preferred stock is cumulative and participating, how much will the common stockholders receive

Common stockholders will receive $132,000

Explanation:

Common stock = 600,000 shares * $2 par = $1,200,000

Preferred stock = 120,000 shares * $5 stated = $600,000

Common stcok dividends = 600,000 shares * $2 par * 6% = $72,000

Preferred stock dividends = 120,000 shares * $5 stated * 6% = $36,000

As the cumulative and participating, the preferred stock holders are to be paid the dividends which were not paid in the earlier years and the preferred stock holders will participate in the excess profits.

Amount to be paid to preferred stock holders = $36,000 * 3 = $108,000

Amount to be paid to common stock holders = $72,000

Excess amount after payment of dividends = $270,000 - $108,000 - $72,000 = $90,000

$90,000 has to be prorationed between preferred stock and common stock holders.

Common stock holders will receive $90,000 * $1,200,000 / $1,800,000 = $60,000

Common stockholders will receive $72,000 + $60,000 = $132,000

$162,000

Explanation:

Dividend distributed to preferred share is based on the predetermined rate associated with these share. When the dividend is declared preferred share dividend is paid first. The remainder is distributed between the common stockholders.

Value of Preferred share = 120,000 shares x $5 par value = $600,000

Preferred Dividend = $600,000 x 6% = $36,000

Accrued dividend for 2 years = 2 x $36,000 = $72,000

Dividend Declared = $270,000

Total preferred Dividend  = $72,000 + $36,000 = $108,000

Dividend Available for Common stockholders = $270,000 - $108,000 = $162,000

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