Eastern Corporation had the following information on its January 1 Balance Sheet

Question

Eastern Corporation had the following information on its January 1 Balance Sheet Preferred stock, cumulative, 9%$20 par Common Slook, 55 par Additional Paid-In Capital $2.200 7,600 4,500 Retained Earnings 30.000 Total Equity 52.200 1. tHow many prefered shares have been issee 2. How many common shares have been issued? Assume all of the additional paid-in capital relates to common stock 3. How much cash was received (in total) when all the common stock was issued? 4. How much cash was received per share? 5. How much is Eastern supposed to pay in preferred share dividends each year? Assume that for the past 2 years, Eastern has not paid these dividends. 6. Is this a liability for Eastern? 7. Where will we see this amount on the financial statements? 8. If Eastern were to pay all required dividends this year: How much would that be (in total)? Assume that during the year, Eastern earned $15,000 of net income and paid all of the preferred share dividends you calculated in (E). 9. What is Eastern's balance in retained earnings at December 31? If no dividends were paid on common shares

Explanation / Answer

1. Number of shares of preferred stock issued = 110 ($2,200 / $20 par value)

2. Number of shares of common stock issued =1,500 (7,500 / $5 par value)

3. Cash received when all the common stock was isued = $7,500 + $4,500 = $12,000.

4. Cash received per share of common stock = $12,000 / 1,500 = $8

5. Prefered dividend payable each year = 9% of $2,200 = $198.

6. Since the prefereed shares are cumulative, Eastern Company has a libility to pay all the unpaid dividends.

7. These amounts are reported under " Liabilities" section.

8. The amount of prefered dividend to be paid this year will be = $198 x 3 = $594 ( $198 for three years including the current year)

9.

If all the dividends are paid:

Beginning retained earnings as at Jan.1 =$38,000

Net income for the year =$15,000

Preferred dividend paid =- $594   

Ending retained earnings as at Dec.31 =$52,406   

If no dividend is paid :

Beginning balance as at Jan.1 $38,000

Net inocme for the year $15,000

Ending balance as at Dec.31 $53,000

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