Response: a. $18,000
Clarification:
Cumulative Preferred Shares are types of shares whereby the company consistently pays Preferred dividends and if it cannot do so in any given year, the unpaid amount accumulates until they can pay it later.
In the question posed, the dividends owed to Preferred Shares are calculated as follows:
= 4% * 200,000
= $8,000
In the first year, $8,000 was allocated for dividends.
= 8,000 - 8,000
= 0
This implies that there are no preferred dividends owed from Year 1.
In Year 2, $18,000 was declared for dividends,
= 18,000 - 8,000
= $8,000
This indicates that in Year 2, the company managed to fulfill its Preferred dividends and still had funds available to distribute to Common Shareholders.
In Year 3, $24,000 was dedicated to dividends.
= 24,000 - 8,000
= $16,000
Therefore, in year 3, the company had enough funds to cover its Preferred Dividend commitments, meaning it paid out all of the $8,000 due to the Preferred Shareholders.
