and 60,000 shares of $10 par value common stock. The preferred stock was issued in January 2003, and no dividends were declared in 2003 or 2004. In 2005, Minnesota Fats declares a cash dividend of $300,000.
How will the dividend be shared by common and preferred if the preferred is (a) noncumulative and (b) cumulative?

The preferred stock is first in line in collecting dividends. Cumulative preferred stock collects up until the money it should have gotten in past years is satisfied.

(a) Noncumulative preferred stock does not take into consideration how much should have been paid in years past. Therefore, the 10,000 shares of preferred stock receive $80,000 (10,000 shares * 100 par value * 8% dividend rate) of the dividend & the rest goes to the common shareholders.

(b) Cumulative preferred stock takes into consideration past dividends that were not paid. In this case, the 10,000 preferred shares receive $80,000 for each of the years 2003, 2004, & 2005, totaling $240,000. The common shareholders receive the rest of the dividend ($60,000).