\"Sophia Dueno organized Newtown Type, Inc. in January 1999. The corporation imm
ID: 2461120 • 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
1.
2.
The two reasons a corporation may choose to issue cumulative preferred stock rather than finance operations with long-term debt are:-
Newton Type Inc. Partial Balance Sheet 31-Dec-02 Stockholders equity 10% cumulative preferred stock, $100, 5,000 $500,000 shares authorized, issued and outstanding $8 cumulative preferred stock, no-par value, 10,000 shares authorized, 5,000 shares issued and outstanding $540,000 Common stock, $1 par, 150,000 shares authorized, 75,000 shares issued and outstanding 75,000 Additional paid-in capital: Common stock 825000 $1,940,000 Retained earnings* 762,500 Total stockholders equity $2,702,500 Computation of retained earnings at December 31, 2002: Retained earnings ate Dec. 31, 2000 220,000 Add: Net Income for 2000 and 2001 930,000 Net Income for four-year period 1,150,000 Less: Dividends paid on 10% preferred stock: 2000 ($50,000 in arrears) - 2001 ($50,000 in arrears for 2 years) 100000 2002 (10% x $100 x 5,000 shares = $50,000) 50,000 -150000 Dividends on $8 preferred stock: 2001 ($8 x 5,000 shares) 40000 2002 ($8 x 5,000 shares) 40000 -80000 Dividends on common stock 2001 ($0.60 x 75,000) 45000 2002 ($1.50 x 75,000) 112500 -157500 Retained earnings ate Dec. 31, 2002 762,500Related Questions
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