Question

Carter Company has $800,000 of 6% preferred stock and $1,200,000 of common stock outstanding, each having a par value of $10 per share. No dividends have been paid or declared during the last two years, 2020 and 2019. As of December 31, 2021, the Board of Directors has decided to distribute $420,000 in cash dividends and needs help in determining the allocation between Preferred Stockholders and Common Stockholders. Assuming the preferred stock is noncumulative and nonparticipating, how much of the $420,000 will be allocated to Common Stockholders

Answer 1

Answer and Explanation:

The computation of the allocation done between the preferred and common stockholder is shown below

Given that

Total dividend for current year = $420,000

Less: preference dividend -$40,000 ($800,000 × 5%)

Balance for common stock $380,000

The $40,000 should be first distributed to the preference stockholder and the remaining would be allocated to the common stockholder