Sweet Company's outstanding stock consists of 1,000 shares of noncumulative 5% preferred stock with a $100 par value and 10,000 shares of common stock with a $10 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends.

Dividend Declared

year 1 $ 2,000

year 2 $ 6,000

year 3 $ 32,000

The total amount of dividends paid to preferred and common shareholders over the three-year period is:

Multiple Choice

A. $15,000 preferred; $25,000 common.

B. $11,000 preferred; $29,000 common.

C. $5,000 preferred; $35,000 common.

D. $12,000 preferred; $28,000 common.

E. $10,000 preferred; $30,000 common.

Option (D) is correct.

Explanation:

Preferred dividend per year:

= (Outstanding preferred stock * Par value of preferred stock) * 5% preferred stock

= (1,000 * $100) * 5%

= ($100,000) * 5%

= $5,000

Any balance left over would be paid to common stockholders.

Year 1:

Paid to preferred stockholders = $2,000

Paid to common stockholders = 0

Year 2:

Paid to preferred stockholders = $5,000

Paid to common stockholders = ($6,000 - $5,000)

= $1,000

Year 3:

Paid to preferred stockholders = $5,000

Paid to common stockholders = ($32,000 - $5,000)

= $27,000

Therefore,

Total amount of dividends paid to preferred Shareholders:

= Year 1 + Year 2 + Year 3

= $2,000 + $5,000 + $5,000

= $12,000

Total amount of dividends paid to common Shareholders:

= Year 1 + Year 2 + Year 3

= $0 + $1,000 + $27,000

= $28,000