Stockholders’ equity of Ernst Company consists of 79,000 shares of $5 par value, 9% cumulative preferred stock and 275,000 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 $120,000 cash dividend at the current year-end. Determine the amount distributed to each class of stockholders for this two-year-old company.

Preferred stock dividends is $71,100

Common stock dividends is $48,900

Explanation:

The cumulative preferred stockholders would be paid prior year dividends as well as the current year's,hence would be entitled to two years' dividends with remnant thereafter being paid to common stockholders.

preferred stock dividends=79,000*$5*9%=$35,550

The preferred stock dividends per year is $35,550,which means that they would get $71,100 (dividends for two years).

Common stock dividends=$120,000-$71,100 =$48,900

The rationale for preferred stocks receiving arrears of dividends is because of the cumulative nature which entitles them to arrears of dividends

Explanation:

Amount paid as a preferred dividend

preferred dividend = previous year dividend + current year dividend

   {number of share × par value             +   {number of share × par value

    × preferred dividend percentage}          × preferred dividend percentage}

  {79,000 shares  × $5 each × 9%}  +   {79,000 shares  × $5 each × 9%}

 $35,550 + $35,550  = $71,100

the amount paid as preferred dividend is $71,100

Amount paid as common stock dividend = Total cash dividend paid - preferred dividend = $120,000 - $71,100

       $48,900

the amount paid as common stock dividend is $48,900

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