Grimes & Dotson Ltd. did not pay dividends on its 4.5%, $100 par value cumulative preferred stock during 2018 or 2019. Since 2016, 70,000 shares of this stock have been outstanding. Grimes & Dotson Ltd. has been profitable in 2020 and is considering a cash dividend on its common stock that would be payable in December 2020. The amount of dividends that would have to be paid on the preferred stock before a cash dividend could be paid to the common stockholders is:

$945,000

Step-by-step explanation

Preferred stocks are priority in the distribution of dividends for the year. But when it is cumulative, it means that all prior years that it did not received any dividend will be first in the priority of distribution in the current year.

Par Value of Cumulative Preferred Stock                              $100

Dividend Rate Per Stock                                                          4.5%

Dividends per Preferred Stock                                                $4.5

Outstanding Stocks for 2018 entitled to dividends          70,000 shares

Unpaid Dividend for 2018                                                $315,000

Par Value of Cumulative Preferred Stock                              $100

Dividend Rate Per Stock                                                           4.5%

Dividends per Preferred Stock                                                $4.5

Outstanding Stocks for 2019 entitled to dividends          70,000 shares

Unpaid Dividend for 2019                                                $315,000

Par Value of Cumulative Preferred Stock                              $100

Dividend Rate Per Stock                                                           4.5%

Dividends per Preferred Stock                                                 $4.5

Outstanding Stocks for 2020 entitled to dividends          70,000 shares

Dividends for 2020                                                         $315,000

Unpaid Dividend for 2018                                                $315,000

Unpaid Dividend for 2019                                                $315,000

Dividends for 2020                                                          $315,000

Total Dividends to be paid to Preferred Stock          $945,000

The solution above is in case there are changes in the number of stocks entitled to dividends every year. Since there are not changes for the number of stocks it can also be computed as:

Par Value of Cumulative Preferred Stock                              $100

Dividend Rate Per Stock                                                           4.5%

Dividends per Preferred Stock                                                 $4.5

Outstanding Stocks for 2020 entitled to dividends          70,000 shares

Dividends per year                                                            $315,000

Number of years to be paid                                                     X    3 years

Total Dividends to be paid to Preferred Stock          $945,000