Question

In: Accounting

Match each description 1 through 4 with the characteristic of the preferred stock that it best describes by writing the letter of that characteristic in the blank next to each description.

A. Cumulative B. Noncumulative C. Nonparticipating D. Participating

1. Holders of the stock are entitled to receive current and all past dividends before common stockholders receive any dividends.

2. Holders of the stock can receive dividends exceeding the stated rate under certain conditions.

3. Holders of the stock are not entitled to receive dividends over the stated rate.

4. Holders of the stock lose any dividends that are not declared in the current year.

Expert Solution

Step-by-Step Solution

Step 1: Definition of Preference stock

Stocks issued by the company indicate that the holders of the preferred stock are given priority while issuing dividends.

Step 2: Characteristics of cumulative preference stock

Holders of the stock are entitled to receive current and all past dividends before common stockholders receive any dividends. Statement 1 has all the characteristics of cumulative shares. Hence, statement 1 is correct.

Step 3: Characteristics of non-cumulative preference stock

The non-cumulative preference stocks are those stocks in which the pending dividend of the current year does not pay in the next year. It means the stockholder does not get the previous dividend. Hence, statement 4 is correct

Step 4: Characteristics of Non-participating

The non-participating shareholders are those shareholders who do not entitle to receive dividends over the stated rate. Their rate of dividend always remains the same. Hence, statement 3 is correct.

Step 5: Characteristics of Participating

The participating shareholders are those shareholders who are entitled to receive dividends over the stated rate. Their rate of dividend always does not remains the same. Hence, statement 4 is correct.

Holders of the stock are entitled to receive current and all past dividends before common stockholders receive any dividends: - A

Sahil Dangi answered 2 years ago

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