Approach: Compute the preferred's current year preference (50,000 shares X $10 par X 4% = $20,000). Then use the steps listed in Illustration 11-5 to solve.
TIP: A preferred stockholder is entitled to receive his current year preference as to dividends ($10 × 4% = $.40 per share in this case) before common stockholders receive any dividends. If the preferred stock is cumulative, any preferred's preference not declared is said to be “in arrears.” In a future year when dividends are declared, any dividends in arrears must be paid to preferred before common stockholders can receive any dividends. Dividends in arrears are not a liability because by definition, they have not been declared; dividends become a liability at the declaration date.