Marcy Company did not pay any dividends in 2004. In 2005, they declared and paid total dividends of $4,000, and in 2006, they declared total dividends of $20,000. How much dividends will be paid to preferred and common stockholders in 2006

Dividends paid to preferred and common stockholders in 2006 will be :

Preferred stockholders get $20,000

Common stockholders get $0

Explanation:

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Preferred Stockholders received their dividends first before the common stockholders do. This is because the Preferred Equity have first preference when it comes to payments of dividends.

Also, when the dividends are cumulative, it means that the previous amounts of dividends not paid are payable in future when the distribution is made. Preference dividends are payable as a fixed amount of stocks outstanding during the reporting period.

That said, the amounts of dividends to be paid to preferred and common stockholders in 2006 can be calculated as follows :

2004

Dividends Declared = $0

Preference dividends Payable = ($100,000 + $250,000) × 6 % = $21,000

Paid to Common Shareholders  = $ 0

2005

Dividends Declared = $4,000

Paid to Preference Shareholders = $4,000

Paid to Common Shareholders  = $ 0

Payable to Preference Shareholders = $17,000 (2004) + $21,000 (2005) = $38,000

2006

Dividends Declared = $20,000

Paid to Preference Shareholders = $20,000

Paid to Common Shareholders  = $ 0

Payable to Preference Shareholders =  $18,000 (2005) + $21,000 (2006) = $39,000

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