Watson, Inc. has 10,000 shares of 6%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2014. There were no dividends declared in 2012. The board of directors declares and pays a $100,000 dividend in 2013 and in 2014. What is the amount of dividends received by the common stockholders in 2014? a. $20,000. b. $60,000. c. $100,000. d. $0.

a. $20,000

Explanation:

As for the information provided,

Total shares outstanding preference cumulative in nature = 6% 10,000 shares of $100 each = 6% $1,000,000

Dividend for each year = $60,000

Equity = 20,000 shares of $1 each = $20,000

Since no dividend is paid in 2012, the preference dividend will be in arrears for 2012 = $60,000

Dividend in 2013 = Dividend to preference for 2012, and for 2013

= $60,000 + $60,000 = $120,000

Since dividend paid = $100,000

$20,000 of preference dividend for 2013 stands in arrears.

Dividend in 2014 = $100,000

This shall be first used to pay dividend in arrears = $100,000 - $20,000 = $80,000

From this first dividend to preference for 2014 will be paid = $80,000 - $60,000 = $20,000

Now this $20,000 will be paid to equity as dividend.