Question

Stockit Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock outstanding. In its first 2 years of business, Stockit did not declare a dividend. Stockit's balance sheet at the end of its first 2 years of business should include:

Answer 1

Stockit Inc. must report an accumulated dividend obligation of $10,000 on its balance sheet after 2 years without declaring dividends on its 1,000 shares of 5%, $100 par value, cumulative preferred stock.

Step-by-step explanation:

The question involves Stockit Inc., which has 1,000 shares of 5%, $100 par value, cumulative preferred stock outstanding.

Since dividends were not declared in its first 2 years, the company has accumulated dividend obligations that it must honor prior to paying dividends to common shareholders.

In calculating this, we multiply the par value of one share ($100) by the dividend rate (5%), which gives us $5 per share per year.

Multiply this by the number of shares (1,000), and we get $5,000 per year.

Over two years without dividends, the total accumulated dividend obligation is $5,000/year * 2 years = $10,000.

This amount should be reported in the balance sheet as a liability.