Question

Red October Company has 2,000 shares of 6%, $100 par cumulative preferred stock outstanding at December 31, 2016. No dividends have been paid on this stock for 2016 or 2017. Dividends in arrears at December 31, 2017 total:______.
a. $1,200.
b. $12,000.
c. $0.
d. $24,000.

Answer 1

Answer:

d.$24,000

Explanation:

The preferred stock is cumulative, in that preferred stockholders are entitled to arrears of dividends for years in which dividends were not paid let alone declared.

The dividends owed to preferred stockholders were for 2 years , 2016 and 2017, hence, we compute the outstanding preferred stock dividends for the 2 years as follows:

annual  preferred stock dividends=number of stocks*par value*dividend rate

number of stocks=2,000

par value=$100

dividend rate=6%

annual  preferred stock dividends=2,000*$100*6%

annual preferred stock dividends =$12,000

2 years' dividends=$12,000*2=$24,000