Stockholders\' Equity in a Balance Sheet Sophia Dueno organized Newtown Type, In
ID: 2460049 • Letter: S
Question
Stockholders' Equity in a Balance Sheet
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 $100 par value cumulative preferred stock. Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operations with long-term debt.
Explanation / Answer
supporting schedule
Retained earnings => 220000+772500=> 992500
Two reasons a corporation may choose to issue cumulative preferred stock rather than finance operations with long-term debt.
1. Issuing Stock is a capital, one got voting rights in a company, while with long term debt is a liabilty and it is a borrowing for a company . Although cumulative dividends must eventually be paid if the corporation is profitable,they do not have to be paid each year and do not become a legal obligation of th ecorporation until they are declared. Interest on debt is a legal obligation of the corporation and must be paid each year.
2. Debt must be repaid at some future date or can say by fixed date else will attract more interest, where as preferred stock generally doesnot mature.
2.
PARTICULARS AMOUNT ($) Net Profit 930000 Dividend in 2001 45000 Dividend in 2002 112500 Profit 772500