At January 1,20D,Clare Corporation had outstanding capital shares as shown below.During December,20D,it declared and paid cash dividends of $48,000 to the preferred shareholders. (1)Common shares--100,000 shares outstanding
(2)Preferred shares--20,000 shares outstanding,$0.80 cumulative.The shares were issued at a price of $15 per share.
How many years were the preferred dividends in arrears?

Question

Quizplus · Accepted Answer

The preferred shares are cumulative, meaning that any unpaid dividends accumulate over time. Since the total amount of dividends paid to the preferred shareholders was $48,000 and the dividend rate is $0.80 per share per year, the dividends in arrears can be calculated as follows:

Dividends in arrears = (Dividend rate x Number of preferred shares) - Dividends paid 
Dividends in arrears = ($0.80 x 20,000) - $48,000 = $16,000

Therefore, the preferred shareholders were in arrears for 2 years, since $16,000 represents the unpaid dividends for 2 full years ($0.80 x 20,000 x 2 = $32,000).

At January 1,20D,Clare Corporation Had Outstanding Capital Shares as Shown