For example, if a corporation has cumulative preferred stock with an annual dividend of $10,000 and it has omitted the dividends for the past three years, there is $30,000 of dividends in arrears. In order to pay any dividend to its common stockholders, the corporation will have to first pay its preferred stockholders $40,000. That is the amount of the past omitted dividends of $30,000 and the current year preferred dividend of $10,000.
Using the information above, but assuming that the corporation pays a total of only $5,000 in dividends in the current year, the preferred stockholders must receive the entire $5,000 and the dividends in arrears will be $35,000 at the end of the current year.
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