Halverstein Company's outstanding stock consists of 7,000 shares of cumulative 5% preferred stock with a $10 par value and 3,000 shares of common stock with a $1 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends. Dividend Declared Year 1 $ 0 Year 2 $ 6,000 Year 3 $ 32,000 The amount of dividends paid to preferred and common shareholders in Year 2 is:

In Year 2 Preferred Stockholders were paid $6,000 , whilst Common Stockholders were paid $0.  

Explanation:

The Preference Shareholders have preference over the Common Stockholders when it comes to payments of dividends.

Also when the Preference Stocks are cumulative, it means that any dividends in arrears need to be honored before the next dividend distribution.

Preference Stock Dividend is the same per year and is calculated as follows :

Preference Stock Dividend = 7,000 × $10 × 5%

                                             = $3,500

Summary of Dividends Paid are as follows :

Year 1

Preference Stock Dividend Paid = $0

Common Stock Dividend Paid = $0

Preference Stock Dividend in Arrears = $3,500

Year 2

Preference Stock Dividend in Arrears for year 1 paid = $3,500

Preference Stock Dividend Paid for year 2 = $ 2,500

Preference Stock Dividend in Arrears = $1,000

Common Stock Dividend Paid = $0

Conclusion :

In Year 2 Preferred Stockholders were paid $6,000 whilst Common Stockholders were paid nothing.  

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