\"Sophia Dueno organized Newtown Type, Inc. in January 1999. The corporation imm
ID: 2460089 • Letter: #
Question
"Sophia Dueno organized Newtown Type, Inc. in January 1999. The corporation immediately issued at $12 per share one-half of its 150,000 authorized shares of $1 par value common stock.
On January 2, 2000, the corporation sold at par value the entire 10,000 authorized shares of 10%, $100 par value, cumulative preferred stock.
On January 2, 2001, the company again needed money and issued 5,000 shares of an authorized 10,000 shares of no-par, cumulative preferred stock for a total of $540,000. The no-par shares have a stated dividend of $8 per share.
The company declared no dividends in 1999 and 2000. At the end of 2000, its retained earnings were $220,000. During 2001 and 2002 combined, the company earned a total of $930,000. Dividends of 60 cents per share in 2001 and $1.50 per share in 2002 were paid on the common stock. "
a. Prepare the stockholder’s equity section of the balance sheet at December 31, 2002. Include a supporting schedule showing your computation of retained earrings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends and net losses decrease retained earnings.)
b. Assume that on January 2, 2002, the corporation could have borrowed $1,000,000 at 10% interest on a long-term basis instead of issuing the 10,000 shares of the $100 par value cumulative preferred stock. Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operations with long-term debt.
Explanation / Answer
Two advantages of preference share over debt as means of capital raisisng are ;
1. For debts the interest payment has to be made in each period whether there is profit or not, but in preference share the predetermined dividend may not be paid in an year when there is no profit. In cumulative preference shares the dividend can be deferred till enough profit is made at a later year. This is a great advantage to pay the dividend as per cash availability unlike debt.
2. In debt the interest rate and term of repayment is determined by the lending institution . In case of preference share, the dividend rate and the face value repayment terms are decided by issuing company itself. In most cases the prference shares are not redeemed at all. This is a huge advantage for the companies issuing preference shares.
Newtown Type Inc. Date Details No Of Shares Par value Issued value at Par /no par Additional Paid in Capital Preference diidend rate Preference diidend per year Jan 1999. Common stock @$12 75,000 1 75,000 825,000 Jan 2.2000. Preference share10% cumumlative 10,000 100 1,000,000 10% 100,000 Jan 2.2001. Preference share no par cumumlative 5,000 540,000 - 8 per share 40,000 Cumulative preference dividend s 10% Pref share No par pref share Year 2000 100,000 Year 2001 100,000 40,000 Year 2002 100,000 40,000 Cumulative preferred dividend payable till 2012 380,000 Common stock divodends paid 2001 dividend -@0.60 per share= 45,000 2002 dividend @1.50 per share = 112,500 Total Dividends paid till 2002 157,500 Balance of Retained Earning in 2000 end 220,000 Adition of net earning in 2001 & 2002 930,000 Less Preference dividedn paid (380,000) Less Common stock dividend paid (157,500) Balance of Retained Earning end of 2002 612,500 Newtown Type Inc. Balance Sheet (Partial) As on Dec 31.2002 Stockholders Equity Section Details Amt $ Common Stock ( 150000 authorised, 75000 issued ) $1 par 75,000 Additional Paid in Capital -Common stock 825,000 Pereference Share $100 par , 10% cumulative (10000 authorised and issued) 1,000,000 Pereference Share , no par , $8 /share cumulative dividend (10000 authorised and 5000 issued) 540,000 Retaine Earning 612,500 Total Stock holders Equity 3,052,500Related Questions
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