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A corporation has 25,000 shares of $3 non-cumulative preference shares and 100,000 ordinary shares. In a year it declares $60,000 in total dividends. How is this split between preference and ordinary shareholders?
A$45,000 to preference and $15,000 to ordinary
B$75,000 to preference and $0 to ordinary
C$60,000 to preference and $0 to ordinary
D$60,000 to ordinary and $0 to preference
Answer & Solution
Correct answer: C. $60,000 to preference and $0 to ordinary
1. Preference shareholders are entitled to $25{,}000 \times \$3 = \$75{,}000$ before ordinary shareholders receive anything.
2. Only $60,000 is declared, which is less than the $75,000 preference entitlement.
3. Preference receives the entire $60,000; ordinary receives $0.
4. Since the shares are non-cumulative, the $15,000 shortfall is never made up later.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §6.9 "Cash Dividends Calculations", p.258_