Westerville Company reported the following results from last year’s operations: net income of \$120,000, declared and paid cash dividends of \$30,000 on common stock, and \$10,000 on preferred stock. If the preferred stock is cumulative and \$5,000 in dividends were in arrears at the beginning of the year, what total amount of dividends did preferred shareholders receive during the year?

• A. \$5,000
• B. \$15,000
• C. \$30,000
• D. \$10,000

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of cumulative preferred stock. Cumulative preferred stock means that any unpaid dividends from previous years (arrears) must be paid to preferred shareholders before any dividends are paid to common shareholders.
2. Step 2: Identify the dividends in arrears at the beginning of the year. The problem states that there were \$5,000 in arrears for preferred shareholders.
3. Step 3: Add the dividends declared and paid on preferred stock during the year. The problem states that \$10,000 in dividends were declared and paid to preferred shareholders during the year.
4. Step 4: Calculate the total dividends received by preferred shareholders by summing the dividends in arrears (\$5,000) and the dividends declared and paid during the year (\$10,000).
5. Step 5: Verify that the total amount of dividends received by preferred shareholders is prioritized before any dividends are paid to common shareholders, ensuring the cumulative nature of preferred stock is respected.