Dividends in arrears are not a liability. No payment obligation exists until dividend is declared by the board of directors. Only disclose in the financial statements EXAMPLE: Assume A corporation has 5,000 shares of 7%, $100 par value, and cumulative preferred stock outstanding. The annual dividends are $35,000, but dividends are two years in arrears? What are the dividends for the current year? LIQUIDATION PREFERENCE Most preferred stock has a preference on corporate assets if corporation fail, it may be for par value or for a specific liquidating value. CONVERTIBLE PREFERRED STOCK (EXCHANGE OF PREFERRED STOCK INTO COMMON STOCK AT A SPECIFIED RATIO) EXAMPLE Assume that 1,000 shares of A corporation 0 par preferred are issued at $105 and are converted into 10,000 shares of common stock ($5 par) when the market value per share of the two classes of stock are $101 and $12 respectively. What is the entry to record the conversion??