Outstanding stock of the Ayayai Corporation included 40000 shares of $5 par common stock and 13000 shares of 5%, $10 par non-cumulative preferred stock. In 2019, Ayayai declared and paid dividends of $4000. In 2020, Ayayai declared and paid dividends of $20000. How much of the 2020 dividend was distributed to preferred shareholders?

$6,500

Explanation:

outstanding common stock 40,000

outstanding preferred stock 13,000 stocks of 5%, $10

preferred stock dividends per year = 13,000 x 5% x $10 = $6,500

The company only paid $4,000 in dividends during 2019, but since the preferred stocks are non-cumulative, the remaining $2,500 will not be paid in 2020.

dividends paid during 2020 = $6,500

If the preferred stocks were cumulative, then the company would have paid $6,500 + $2,500 = $9,000 in 2020

$9,000Explanation:

Preferred stockholders has an advantage that they are paid first when there is any dividend is announced. The residual dividend will be divided into the common stockholders. Any prior years due dividend and current years dividend associated with preferred share will be paid first.

As per given data

Preferred shares = 13,000 x $10 = $130,000

Dividend on preferred shares = $130,000 x 5% = $6,500 per year

As in 2019 dividend of $4,000 was declared and all of this will be paid to preferred stockholders, the dividend of $2,500 ($6,500 - $4,000 ) is due in respect of preferred dividend.

2020

Arrears of 2019 = $2,500

Dividend of 2020 = $6,500

Total Dividend due in 2020 = $2,500 + $6,500 = $9,000

Dividend of $9,000 is paid to preferred stockholders and $11,000 (20,000-10,000) to common stockholders in 2020.

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