Outstanding stock of the West Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 5%, $10 par non-cumulative preferred stock. In year 1, West declared and paid dividends of $4,000. In year 2, West declared and paid dividends of $20,000. How much of the year 2 dividend was distributed to preferred shareholders?

Preference shares entitles the holders to participate in a fixed dividend out of the profit made by the company. The divide is always a fixed percentage of the nominal value of the preference shares

It can be cumulative and non-accumulate.

Cumulative simply implies that should the company misses the payment of dividend in a particular year such unpaid dividend would be carried carried forward and paid in arrears in the following year/

Non-cumulative is the exact opposite of the case . Here, unpaid dividends are not paid in arrears in fact such are forfeited for life.

Dividend in Year 1

Dividend paid in Year 1 was $ 4000 but ought to be $5,000 (5%× 10,000 × $10). An arrear of $1000

Dividend in Year 2

Dividend paid = (5%× 10,000 × $10) = $5000.

Note that the unpaid dividend of $1,000 in year 1 is lost forever