Kean's Pumping, Inc. has 20,000, $4, cumulative preferred shares issued at $150, and 100,000 common shares issued at $1, at December 31, 2014. If the board of directors declares a $60,000 dividend, the
A) preferred shareholders will receive 1/10th of what the common shareholders will receive.
B) preferred shareholders will receive the entire $60,000.
C) $60,000 will be held as restricted retained earnings and paid out at some future date.
D) preferred shareholders will receive $30,000 and the common shareholders will receive $30,000.

Question

Quizplus · Accepted Answer

The preferred shareholders will receive the entire $60,000 because they have a cumulative dividend right of $4 per share on 20,000 shares, totaling $80,000. Since the declared dividend is $60,000, it is less than the total preferred dividends, so all of it goes to the preferred shareholders.