Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Determine the dividends in arrears for preferred stock for the second year.

Question

Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends:  Determine the dividends in arrears for preferred stock for the second year.

Quizplus · Accepted Answer

Dividends in arrears for preferred stock are the unpaid dividends from previous years. In this case, since the preferred stock is cumulative, the dividends in arrears accumulate year after year until they are paid. The dividends for the first year were $80,000 (2% of $100 par value * 20,000 shares). Since only $30,000 were paid for the second year, the dividends in arrears for preferred stock for the second year would be $50,000 ($80,000 - $30,000). Therefore, the best choice is A, which represents the correct amount of dividends in arrears for preferred stock for the second year.

Sabas Company Has 20,000 Shares of $100 Par, 2% Cumulative