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With $3 cumulative preference shares carrying $145,000 of arrears entering year 4 (annual entitlement $75,000), a $175,000 dividend is declared in year 4. How is the year-4 dividend allocated?
A$75,000 to preference and $100,000 to ordinary
B$175,000 to preference and $0 to ordinary
C$145,000 to preference and $30,000 to ordinary
D$220,000 to preference and $0 to ordinary
Answer & Solution
Correct answer: B. $175,000 to preference and $0 to ordinary
1. Preference must receive arrears plus current year first: $145{,}000 + 75{,}000 = \$220{,}000$.
2. Only $175,000 is declared, which is less than the $220,000 required.
3. Preference takes the entire $175,000; ordinary receives $0.
4. Remaining arrears = $220{,}000 − 175{,}000 = \$45{,}000$ carried to year 5.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §6.9 "Cash Dividends Calculations", p.259_