Final answer:
In Year 2, Halverstein Company paid $3,500 in dividends to preferred stockholders and $2,500 to common stockholders, accounting for the arrears owed to preferred shareholders due to the cumulative nature of their preferred stock.
Step-by-step explanation:
The question concerns dividend distribution to preferred and common stockholders of Halverstein Company, a hypothetical organization. To determine the amount of dividends paid in Year 2, we must first account for the cumulative preferred dividends. Halverstein's preferred stock is 5% cumulative, and there are 7,000 shares with a $10 par value, which amounts to an annual dividend of $3,500 (7,000 shares × $10 × 5%). In Year 1, no dividends were paid, so the amount owed to preferred stockholders carries over to Year 2. Therefore, in Year 2, the first $3,500 of the $6,000 total dividends declared must be paid to the preferred shareholders to cover their arrears from Year 1.
After the preferred dividends are paid, any remaining dividends can be paid to common stockholders. Since $3,500 was paid to preferred stockholders out of the $6,000 total, the common stockholders received the remainder, which is $2,500 ($6,000 total - $3,500 preferred).
The correct answer for the Year 2 dividends is Option (b): $3,500 paid to preferred stockholders and $2,500 paid to common stockholders.