Weisberg Corporation has 10,900 shares of $100 par value, 8%, preferred stock an

Question

Weisberg Corporation has 10,900 shares of $100 par value, 8%, preferred stock and 52,100 shares of $10 par value common stock outstanding at December 31, 2010.

Answer the questions in each of the following independent situations.

(a) If the preferred stock is cumulative and dividends were last paid on the preferred stock on December 31, 2007, what are the dividends in arrears that should be reported on the December 31, 2010, balance sheet as a note in the stockholders' equity section?

(b) If the preferred stock is convertible into 8 shares of $10 par value common stock and 4,300 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value?

(c) If the preferred stock was issued at $107 per share, how should the preferred stock be reported in the stockholders' equity section?

Explanation / Answer

(a) Annual Pref Share dividend = 8%*$100*10900 = $87,200 So if Pref share dividend was last paid in De 2007, it is now due for 3 yrs till Dec2010. So Total Cumulative dvidend due is 3* $87,200 = $261,600 (b) Each Pref Share will get converted to 8 Common Stock So 4300 Pref Shares will result in 4300*8 = 34,400 Common Stock 4300 Pref SHares of $100 each = $430,000 34400 common stock of $10 = $344,000 So Premium is $430,000-$344,000 = $86,000 which is charged to Retained earnings Journal entry will be Convertible Preferred Stock Dr 430,000 Common Stock Cr 344,000 Retained Earnings Cr 86,000 The rationale for the Credit to Retained Earnings is that the preferred stockholders are offered an additional return to facilitate their conversion to common stock (c) Preferred stock, $100 par, 8%, 10900 shares authorized, 10900 shares issued and outstanding .................................$1,090,000 Contributed capital in excess of par value, Pref stock . . . . . . $76,300

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