Dividends on cumulative preferred shares of $3,000 are in arrears for 2015.During 2016,the total dividends declared amount to $10,000.There are 5,000 shares of $1 cumulative preferred shares outstanding and 10,000 common shares outstanding.The total amount of dividends payable to each class of shares in 2016 amounts to:

Question

Quizplus · Accepted Answer

The preferred shares are cumulative, which means that any missed dividends from prior years must be paid before any dividends can be paid to common shareholders. Therefore, in 2016, the $3,000 in arrears from 2015 must be paid to preferred shareholders before any dividends can be paid to common shareholders.

The total dividends payable to preferred shareholders in 2016 are $3,000 (arrears) + $5,000 (declared in 2016) = $8,000.

The total dividends payable to common shareholders in 2016 are $10,000 - $8,000 (paid to preferred shareholders) = $2,000.

Therefore, the correct choice is B: $8,000 to preferred, $2,000 to common.

Dividends on Cumulative Preferred Shares of $3,000 Are in Arrears