Fletcher Ltd was incorporated on 1 January 2014 and on that date issued:
$$\begin{array} { | l | l | l | }
\hline 5 \% / 1 \text { Preference shares } & \text { for } \$ 1 & 4000 \text { shares } \
\hline \text { Ordinary shares } & \text { for } \$ 10 & 5000 \text { shares } \
\hline
\end{array}$$
During December 2017 DT Ltd declared a total of $5000 in dividends.This was the first dividend declared by DT Ltd,that is,no dividends were declared or paid during the first two years of operations.If the preference shares are cumulative and non-participating the total amount of the $5000 dividend that will be available for payment to the ordinary shareholders is:

Question

Fletcher Ltd was incorporated on 1 January 2014 and on that date issued:
$$\begin{array} { | l | l | l | } 
\hline 5 \% / 1 \text { Preference shares } & \text { for } \$ 1 & 4000 \text { shares } \
\hline \text { Ordinary shares } & \text { for } \$ 10 & 5000 \text { shares } \
\hline
\end{array}$$
During December 2017 DT Ltd declared a total of $5000 in dividends.This was the first dividend declared by DT Ltd,that is,no dividends were declared or paid during the first two years of operations.If the preference shares are cumulative and non-participating the total amount of the $5000 dividend that will be available for payment to the ordinary shareholders is:

Quizplus · Accepted Answer

Since the preference shares are cumulative, any unpaid dividends from previous years must be paid before any dividends can be paid to ordinary shareholders. Therefore, the $5000 dividend must first be used to pay the preference shareholders their dividend for the current year, which is calculated as $1 per share (5% of $1 par value).

Number of preference shares = 4000 
Preference dividend = $1 per share 
Total preference dividend = $1 x 4000 = $4000

After paying the preference dividend, there is $1000 ($5000 - $4000) left for the ordinary shareholders. This amount will be distributed among the 5000 ordinary shares:

Dividend per share = $1000 ÷ 5000 = $0.20 
Total dividend for ordinary shares = $0.20 x 5000 = $1000

Therefore, the total amount of the $5000 dividend that will be available for payment to the ordinary shareholders is $1000, which is answer choice B.

Fletcher Ltd Was Incorporated on 1 January 2014 and on That