Luther Inc., has 2,000 shares of 6%, $50 par value, cumulative preference shares and 100,000 shares of $1 par value ordinary shares outstanding at December 31, 2011, and December 31, 2010.The board of directors declared and paid a $5,000 dividend in 2010.In 2011, $24,000 of dividends are declared and paid.What are the dividends received by the preference shareholders in 2011?

Question

Quizplus · Accepted Answer

The preference shares are cumulative, which means that any unpaid dividends from previous years must be paid before any dividends can be paid to ordinary shares. In 2010, a dividend of $5,000 was paid, leaving $2,000 ($50 par value x 6% x 2,000 shares) in unpaid dividends for the preference shares. Therefore, the total dividend payable to preference shares in 2011 is $26,000 ($2,000 unpaid from 2010 + $24,000 declared in 2011). This leaves $2,000 for the ordinary shares. The dividend payable to the preference shares in 2011 is then calculated as: $26,000 - ($1 par value x 100,000 shares) = $7,000. Therefore, the answer is C.