The difference with preferred and common stock when it comes to dividends is that preferred stock will only get what they are entitled to - which is based on the shares, par value and %. Common shareholders could get anything - it has nothing to do with par value or number of shares. The preferred shareholders are paid first. Once you determine how much they have coming, anything left over goes to the common. We did deal with the common shareholders in that we determined that the preferred had $60,000 coming and therefore the remaining $20,000 went to the common shareholders. There was nothing else to calculate for the common - they get the balance after the preferred are satisfied.

I'm not sure exactly what you mean by the preferred always get $20,000 a year. In your example of 20,000 shares of 5%, $20 par value cumulative preferred stock, they get $20,000 per year. (5% x 20,000 x 20) If for example, you had 10,000 shares of 4%, $10 par value cumulative preferred stock, the calculation would be different: 4% x 10,000 x 10 = 4,000 In this case, if the preferred were in arrears for 2 years, they would be in arrears $8,000.

Ok so in the new case where the following apply:

20,000 shares of 5%, $20 par value cumulative preferred stock
2 years in arrears
$35,000 is declared

The firs two years in arrears need to be paid first, which is 40,000. Isn't there still 20,000 for 2011? And aren't preferred stockholders' entitled to the arrears? Not sure what to do with the $35,000...

They will only pay out what is declared. They will pay out $35,000. Since there is $40,000 in arrears, the $35,000 is paid to the preferred shareholders reducing that $40,000 to $5,000 in arrears for 2009 and 2010. They will then also be in arrears of $20,000 for 2011.

Therefore, there is $5,000 for 2009 and 2010 combined in arrears + the 20,000 for 2011. So, preferred stockholders are due 25,000 in 2011 for dividends?

Let me restate this just to be sure you understand.

The $35,000 in dividends declared will all go the to preferred shareholders because their arrears are in excess of $35,000.

At that point, they are now still $5,000 in arrears for 2009 and 2010. If no other dividends are declared in 2011, they will then be in arrears an additional $20,000 for 2011. This $25,000 would have to be satisfied before the common shareholders would get anything.

If in your post, you meant preferred shareholders are then $25,000 in arrears - that is correct. I'm just making sure you understand how the declared $35,000 is distributed.