At December 31, year 2 and year 3, Apex Co. had 3,000
shares of $100 par, 5% cumulative preferred stock outstanding.
No dividends were in arrears as of December 31, year 1. Apex
did not declare a dividend during year 2. During year 3, Apex
paid a cash dividend of $10,000 on its preferred stock. Apex
should report dividends in arrears in its year 3 financial statements
as a(n)

(d) For cumulative preferred stock, dividends not paid
in any year will accumulate and must be paid in a later year before
any dividends can be paid to common stockholders. The
unpaid prior year dividends are called “dividends in arrears.” The
balance of dividends in arrears should be disclosed in the financial
statements rather than accrued, as they are not considered a
liability until they are declared. Dividends in arrears at 12/31/Y3
total $20,000, as computed below.
Year 2 $300,000 × 5% = $15,000
Year 3 $300,000 × 5% = 15,000
Total cumulative preferred dividends $30,000
Less year 3 dividend payment (10,000)
Balance of dividends in arrears $20,000
Answer (c) is incorrect because dividends in arrears are not considered
to be a liability until they are declared. They should be
disclosed parenthetically or in the notes to the financial statements.
Answer (b) is incorrect because the total dividends
amount needs to reflect both the year 2 and year 3 unpaid dividends
since it is cumulative preferred stock. Answer (a) is incorrect because the dividends in arrears would not be considered a
liability until they are declared and the $15,000 amount is the
incorrect balance as discussed above.