Mercury Corp.has 10, 000 shares of $10 par, cumulative, 6% preferred stock and 10, 000 shares of common stock outstanding since being organized at the beginning of 2010.It declared its first dividend of $40, 000 at the end of 2012.This means that
A)all of the $40, 000 dividends available are paid to the preferred stockholders
B)all of the $40, 000 dividends available are paid to the common stockholders
C)an equal dollar amount is paid to each class of shareholder
D)3 years' worth of dividends will be paid to preferred stockholders prior to paying anything to common stockholders

Question

Quizplus · Accepted Answer

The preferred stock is cumulative, meaning any unpaid dividends accumulate. For 3 years (2010, 2011, 2012), the preferred stockholders are owed dividends: 10,000 shares x $10 par x 6% x 3 years = $18,000. The $40,000 dividend will first cover the $18,000 owed to preferred stockholders, with the remainder going to common stockholders.