A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?
A) Record a liability for cumulative amount of preferred stock dividends not declared.
B) Disclose the amount of the dividends in arrears.
C) Record a liability for the current year's dividends only.
D) No disclosure or recognition is required.

Question

Quizplus · Accepted Answer

The company is required to disclose the amount of dividends in arrears in the financial statements or footnotes. This is because cumulative preferred stock dividends are considered a liability and are required to be disclosed until they are paid. Option A is incorrect because there is no obligation to record a liability for past years' dividends not declared. Option C is incorrect because only the current year's dividends are not declared so recording liability for the current year alone is not appropriate. Option D is incorrect because disclosure is required.

A Company Has Not Declared a Dividend on Its Cumulative