Use the following information for questions 74-76.
Instanbul Corp. has outstanding 20,000 no par value, $ 0.80, preferred shares and 100,000 no par value common shares. Dividends have been paid every year except last year and the current year. The carrying value of the preferred shares is $ 200,000 and of the common shares is $ 300,000.
-If the preferred shares are cumulative and non-participating and $ 100,000 is distributed as a dividend, the common shareholders will receive
A) $ 0.
B) $ 68,000.
C) $ 84,000.
D) $ 100,000.

Question

Quizplus · Accepted Answer

Since the preferred shares are cumulative and non-participating, their dividends accrue each year and must be paid before any dividends are paid to common shareholders. Since dividends were not paid last year or this year, the total amount of dividends owed to the preferred shareholders is $ 40,000 ($ 0.80 * 20,000 * 2 years). Therefore, the $ 100,000 dividend must first be used to pay off the preferred shareholders, leaving $ 60,000 ($ 100,000 - $ 40,000) for the common shareholders. The common shareholders will receive $ 60,000 / 100,000 shares = $ 0.60 per share. Multiplying this by the 100,000 common shares yields a total payout of $ 60,000. Therefore, the correct answer is B.

Use the Following Information for Questions 74-76