Mars Corp. has 15,000 shares of $5 par, cumulative, 8% preferred stock and 15,000 shares of common stock outstanding since being organized at the beginning of 2014. It declared its first dividend of $40,000 at the end of 2016. This means that
A) all of the $40,000 dividends available are paid to the preferred stockholders
B) all of the $40,000 dividends available are paid to the common stockholders
C) an equal dollar amount is paid to each class of shareholder
D) 3 years' worth of dividends will be paid to preferred stockholders prior to paying anything to common stockholders

Question

Quizplus · Accepted Answer

The preferred stock is cumulative, which means any unpaid dividends accumulate and must be paid before any dividends can be paid to common stockholders. Since Mars Corp. has not paid any dividends in the past three years, the preferred stockholders are entitled to receive the accumulated dividends for all three years first, which will be $360,000 (15,000 shares x $5 par value x 8% dividend rate x 3 years). After paying the preferred stockholders this amount, any remaining dividends will be paid to the common stockholders. Therefore, choice D is correct.

Mars Corp Has 15,000 Shares of $5 Par, Cumulative, 8% Preferred