Answer to Question #215727 in Accounting for Milan

Question

If cash dividends on preferred stock are not declared in the current year, disclosure of the fact would be required if the preferred stock was

1. Cumulative
2. Non-cumulative

A. 1 only.

B. 2 only.

C. Both 1 and 2

D. Neither 1 nor 2

The answer is A. Can you explain to me why the answer is A only? Thank you.

Answer 1

When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears. Dividends may be declared and paid in cash or stock. A debit balance in the Retained Earnings account is identified as a deficit.