Question

Stockholders’ equity of Ernst Company consists of 80,000 shares of \(5 par value, 8% cumulative preferred stock and 250,000 shares of \)1 par value common stock. Both classes of stock have been outstanding since the company’s inception. Ernst did not declare any dividends in the prior year, but it now declares and pays a $110,000 cash dividend at the current year-end. Determine the amount distributed to each class of stockholders for this two-year-old company.

Short answer

Cumulative preferred stock will receive $40,000, and common stock will receive $70,000.

Step-by-step solution

Explanation on cumulative preferred stock

Cumulative preferred stock refers to the type of preferred stock, wherein arrears of dividends are paid, whenever the dividend is declared, in case the dividend is missed in previous years.

Distribution to each class of stockholders

	CumulativePreferred Stock	Common Stock
Year 1 Step 1: Dividend in arrears ($ 250,000 *$ 1*8%)	20,000	--
Year 2 Step 2: Dividend in arrears ($ 250,000 *$ 1*8%)	20,000	--
Step 3: Remainder to common (110,000 -40,000)	-	$ 70,000
Total dividend to each class of stockholder in Year 2	$ 40,000	$ 70,000