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When Crossett Corporation was organized in January Year 1, it immediately issued 4,000 shares of $50 par, 6 percent, cumulative preferred stock and 50,000 shares of $20 par common stock. Its earnings history is as follows: Year 1, net loss of $35,000; Year 2, net income of $125,000; Year 3, net income of $215,000. The corporation did not pay a dividend in Year 1. Required a. How much is the dividend arrearage as of January 1, Year 2?

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Answer:

The correct answer is $12,000.

Explanation:

According to the scenario, the given data are as follows:

Shares issues On Jan.1 Year 1 = 4,000 shares

Par value of shares = $50 par

Cumulative preferred stock = 6%

So, we can calculate the dividend arrearage as of January 1, Year 2 by using following formula:

Dividend as of Jan.1, year 2 = Shares issues On Jan.1 Year 1 × Par value of shares × Cumulative preferred stock

= 4,000 × $50 × 6%

= $12,000

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Based on the information given the amount of dividend arrearage as of January 1, Year 2 is $12,000.

Using this formula

Dividend  arrearage=Shares issued× Par value× Rate

Where:

Shares issued=4,000 shares

Par value=$50 par

Rate=6% or 0.06

Let plug in the formula

Dividend  arrearage=4,000×$50×0.06

Dividend  arrearage=$12,000

Inconclusion the amount of dividend arrearage as of January 1, Year 2 is $12,000.

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