Orleans Inc.was incorporated on January 1,2012.Orleans issued 4,000 shares of common stock and 500 shares of preferred stock on that date.The preferred stock is cumulative,$100 par,with an 8% dividend rate.Orleans has not paid any dividends yet.In 2015,Orleans had its first profitable year,and on November 1,2015,Orleans declared a total dividend of $28,000.What is the total amount that will be paid out to preferred shareholders?

Question

Quizplus · Accepted Answer

The total amount of preferred dividends to be paid can be calculated as follows:
Dividend per share = Par value x Dividend rate = $100 x 8% = $8
Total preferred dividend = Number of preferred shares x Dividend per share = 500 x $8 = $4,000
Since the preferred stock is cumulative, any unpaid dividends from previous years must also be paid before any common stock dividends can be paid. Since Orleans has not paid any dividends yet, all of the $28,000 in dividends declared will go to the preferred shareholders, meaning a total amount of $4,000 will be paid out to them. Therefore, the correct answer is B.