Had the following shares of stock outstanding at December 31, Year 3: Common Stock, $50 par value, 40,000 shares outstanding; and Preferred Stock, 5 percent, $100 par value, cumulative, 10,000 shares outstanding. Dividends for Year 1 and Year 2 were in arrears. On December 31, Year 3, Max declared total cash dividends of $300,000. The total amounts payable to preferred stockholders and common stockholders, respectively, are:

$150,000

Explanation:

Preference Share Holders have a preferential interest over Common Stock Holders. This means that they are paid their dividends due first before Common Stock Holders.

Note : The Preference Stocks are cumulative meaning that dividends in arrears have to be paid in future when company declares the dividends.

Dividends Paid to Preference Stock Holders

Annual Dividend = 10,000 shares × $100 × 5%

                            = $50,000

Year 3

Cumulative Dividends :

Year 1     = $50,000

Year 2    = $50,000

Year 3    = $50,000

Total       = $150,000

Therefore  Preference Stock Holders are paid a dividend of $150,000

Dividends Paid to Common Stock Holders

The remainder $150,000 ($300,000 - $150,000) is paid to Common Stock Holders.

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