Which of the following statements is true with regard to 7% cumulative, particip

Question

Which of the following statements is true with regard to 7% cumulative, participating preferred stock?

a. The issue price of this stock is reported in the preferred stock account on the balance sheet. b. Stockholders who hold this type of stock are guaranteed a dividend each year. c. If the corporation pays a per share dividend in excess of 7% of the preferred stock's par value and there are no dividends in arrears, the preferred shares will receive a share of the amounts available for distribution as dividends to other classes of stock. d. If dividends are not declared, they accumulate and a liability must be reported on the balance sheet for any amount in arrears that is owed to the preferred stockholders

Explanation / Answer

a) True - Participating Preferred Stock are included as part of the Series of Preferred Stock.

b ) Not True - They will receive the Dividend before common share holders but no guarantee that it will be paid every year . if the corporation does not declare and pay the dividends to preferred stock, there cannot be a dividend on the common stock. A corporation might omit its dividends because it is suffering operating losses and has little cash available

c) Not true - The holders of these preferred shares receive dividend each year before the common stockholders . But the preferred shareholders will get no more than the agreed dividend, even if the corporation's net income increases a hundredfold.

d) Not true - - If a corporation does not pay dividend on its cumulative preferred stock, the omitted dividends are said to be "in arrears" and this must be disclosed in the notes to the financial statements

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