Problem 1. The stockholders\' equity section of MaiStyle Corporation\'s balance
ID: 2509616 • Letter: P
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Problem 1. The stockholders' equity section of MaiStyle Corporation's balance sheet at December 31 is presented here. MAISTYLE CORPORATION Balance Sheet (partial) Stockholders' equity Paid-in capital Preferred stock, cumulative, 10,000 shares authorized,$900,000 6,000 shares issued and outstanding Common stock, no par; 750,000 shares authorized 600,000 shares issued 1,800,000 2,700,000 1,158,000 3,858,000 Less: Treasury stock (8,000 common shares)(32,000) $3,826,000 Total paid-in capital Retained earnings Total paid-in capital and retained earnings Total stockholders' equity Instructions From a review of the stockholders' equity section, answer the following questions. (a) How many shares of common stock are outstanding? (b) Assuming there is a stated value, what is the stated value of the common stock? (e) What is the par value of the preferred stock? (d) If the annual dividend on preferred stock is $36,000, what is the dividend rate on preferred stock? (e) If dividends of $72,000 were in arrears on preferred stock, what would be the balance reported for retained earnings?Explanation / Answer
1. Cumulative Preferred Stocks carry an advantage of receving the divind for past years whenever the company makes profit and it pays dividend. Common stock cannot be paid dividend before Cumulative Preferred stocks.
2. In case of no dividend paid to Cumulative Preferred Stock any year, Company has to report that under Balance Sheet Notes. It is not recognised as Liability in the same year but carried forward through Notes to Balance Sheet.
3. In the question stated above, If the company decides to make a payment of dividend in arrears, Retained earnings would be reduvced by same amount. In this case, $1,086,000 (1,158,000-72,000) would become Retained Earnings. Out of this Retained earnings, before paying the dividend to Common stocks, OCmpany will have to pay dividend for Current Year to Preferred stock.
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