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A corporation with both preferred stock and common stock outstanding has a substantial credit balance in its retained earnings account at the beginning of the current fiscal year. Although net income for the current year is sufficient to pay the preferred dividend of $150,000 each quarter and a common dividend of $90,000 each quarter, the board of directors declares dividends only on the preferred stock. Suggest possible reasons for passing the dividends on the common stock.

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Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436

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Chapter
Section
BuyFindarrow_forward

Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436
Chapter 13, Problem 3DQ
Textbook Problem
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A corporation with both preferred stock and common stock outstanding has a substantial credit balance in its retained earnings account at the beginning of the current fiscal year. Although net income for the current year is sufficient to pay the preferred dividend of $150,000 each quarter and a common dividend of $90,000 each quarter, the board of directors declares dividends only on the preferred stock. Suggest possible reasons for passing the dividends on the common stock.

To determine

Suggest possible reasons for skipping dividends payment by the board of directors of a corporation for the common stocks.

Explanation of Solution

Types of Stock: Generally the corporations issue two primary classes of stocks or paid-in- capital, they are:

  • Common Stock
  • Preferred Stock

Preferred stockholders have some preference on certain matters over the common stockholders including receiving of dividends.

In the present case, even if the corporation had a substantial credit balances as the beginning balance in the retain earnings account and even if the net income of the corporation is sufficient to pay a preferred dividend of...

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Chapter 13 Solutions

Financial Accounting
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