Question

Passed dividends on cumulative preferred shares:

a) are a liability until paid and may turn into a long-term liability with the passage of time
b) are lost forever by the preferred shareholders
c) must be paid by January 1 of the following year by law
d) are referred to as dividends in arrears

Answer 1

Passed dividends on cumulative preferred shares d) are referred to as dividends in arrears and are not considered a liability on the company's balance sheet but must be paid before any dividends are paid to common shareholders.

Step-by-step explanation:

The subject of this question is related to cumulative preferred shares and their dividends.

Specifically, the question asks about passed dividends on these shares.

The correct answer to the question is (d) these are referred to as dividends in arrears.

When a company fails to pay dividends on cumulative preferred shares, those dividends accumulate and must be paid out in the future before any dividends can be paid to common shareholders.

They are not legally considered a liability on the company's balance sheet—rather, they are a constraint on future dividend payments to common shareholders.

Also, there's no legal requirement for these dividends to be paid by January 1 of the following year.