Torino Company has 2,600 shares of $20 par value, 5.5% cumulative and nonparticipating preferred stock and 26,000 shares of $10 par value common stock outstanding. The company paid total cash dividends of $2,500 in its first year of operation. The cash dividend that must be paid to preferred stockholders in the second year before any dividend is paid to common stockholders is:

$3,220

Explanation:

total preferred dividends per year = 2,600 x $20 x 5.5% = $2,860

if $2,500 were paid during year 1, $2,860 - $2,500 = $360 remain to be paid during year 2.

Before common dividends can be paid, the company must first pay $2,860 + $360 = $3,220 in cumulative preferred dividends

If the preferred dividends were not cumulative, then if they are not paid during one year, they will be lost. Only cumulative preferred dividends accumulate from one year to another (or for several years).

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