Analyzing and Distributing Cash Dividends to Preferred and Common Stocks Potter Company has outstanding 16,000 shares of $60 par value, 5% preferred stock and 60,000 shares of $5 par value common stock. During its first three years in business, it declared and paid no cash dividends in the first year, $260,000 in the second year, and $48,000 in the third year. a. If the preferred stock is cumulative, determine the total amount of cash dividends paid to each class of stock in each of the three years.

Year 1

Preferred Stock Dividend = $ 0

Common Stock Dividend = $0

Year 2

Preferred Stock Dividend =  $96,000

Common Stock Dividend  = $164,000

Year 3

Preferred Stock Dividend = $48,000

Common Stock Dividend = $0

Explanation:

Preferred Stock has preference when it comes to payments of dividends. The remainder of the dividends will then be paid to Common Stock Holders after distributions have been made to Preference Stock Holders.

Then, If preferred stock is cumulative, this means all outstanding preferred stock dividends not paid are not waived, but are paid up in the year that the cash for dividend is available.

Preferred stock dividend is fixed calculated as :

Preferred Stock Dividend = 16,000 share x $60 x 5% = $48,000

thus

Cash dividends paid to each class of stock in each of the three years will be determined as :

Year 1

Preferred Stock Dividend = $ 0 , but $48,000 carried over to next year.

Common Stock Dividend = $0

Year 2

Preferred Stock Dividend = $48,000 (current year) + $48,000 (previous year) = $96,000

Common Stock Dividend = $260,000 - $96,000 = $164,000

Year 3

Preferred Stock Dividend = $48,000

Common Stock Dividend = $0

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