On May 1, 20x9, Hammon Company received a charter that authorized it to issue: •
ID: 2445367 • Letter: O
Question
On May 1, 20x9, Hammon Company received a charter that authorized it to
issue:
• 4,000 shares of no-par preferred stock to which a stated value of $12 per share
is assigned. The stock is entitled to a cumulative dividend of $ 9.60, convertible
into two shares of common stock, callable at $ 208, and entitled to $ 200 per
share in liquidation.
• 1,500 shares of $ 400 par value, $ 20 cumulative preferred stock, which is
callable at $ 420 and entitled to $ 412 in liquidation.
• 60,000 shares of no-par common stock to which a stated value of $ 40 is
assigned.
May 1 All of the $ 9.60 cumulative preferred was issued at $ 204 per share, cash.
2 All of the $ 20 cumulative preferred was exchanged for merchandise inventory,
land, and buildings valued at $ 128,000, $ 160,000, and $ 425,000, respectively.
3 Cash of $ 15,000 was paid to reimburse promoters for costs incurred for
accounting, legal, and printing services. In addition, 1,000 shares of common
stock were issued to the promoters for their services. The value of all of the
services (including those paid in cash) was $ 55,000.
a. Prepare journal entries for these transactions.
b. Assume that retained earnings were $ 200,000. Prepare the stockholders'
equity section of the May 31, 20x9, balance sheet.
Explanation / Answer
Dr Cash 2,456,800
Cr Preferred Stock 1,978,000
Cr Additional Paid-In Capital 478,800
If the preferred stock is NOT cumulative, how much of the $534,500 would be paid to common stockholders?
1,978,000 x 7% = 138,460 preferred dividends
534,500 - 138,460 = $396,040 available to common stockholders.
If the preferred stock IS cumulative, how much of the $534,500 would be paid to common
stockholders?
138,460 x 3 = 415,380 preferred dividends
534,500 - 415,380 = 119,120 available to common stockholders
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