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Trusper Company was organized on January 1, Year 1 and has had 1,000 shares of $200 par value, 10% cumulative preferred stock outstanding and 3,000 shares of $1 par value common stock outstanding since that time. Dividends have been declared and paid as follows: $15,000 in Year 1 and $75,000 during Year 2. What is the total amount of dividends that will be paid to common stockholders during Year 2

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Answer:

$50,000

Explanation:

Generally, preferred stockholders receive dividends earlier than common stockholders. Moreover, as the preference shareholders are cumulative, if they do not receive dividends current year, they will receive in the next year. Finally, preferred dividend is fixed until there are new issuance of preferred stock.

Preferred dividends for Year 1 = 1,000 shares × $200 × 10% = $20,000

For year 2 = $20,000

Given, total dividends in year 1 = $15,000

Therefore, company provides $15,000 to preferred dividends. No common dividends in year 1.

However, in the next year (Year 2), the company will pay $5,000 + $20,000 = $25,000 to preferences shareholders.

Therefore, remaining dividends are for common stockholders.

Year 2 common stockholders dividends = $75,000 - $25,000 = $50,000.

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