Maria Martinez organized Manhattan Transport Company in January 2012. The corpor
ID: 2570521 • Letter: M
Question
Maria Martinez organized Manhattan Transport Company in January 2012. The corporation immediately issued at $8 per share one-half of its 200,000 authorized shares of $2 par value common stock. On January 2, 2013, the corporation sold at par value the entire 5,000 authorized shares of 8 percent, $100 par value cumulative preferred stock. On January 2, 2014, the company again needed capital and issued 5,000 shares of an authorized 10,000 shares of no-par cumulative preferred stock for a total of $512,000. The no-par shares have a stated dividend of $9 per share.
The company declared no dividends in 2012 and 2013. At the end of 2013, its retained earnings were $170,000. During 2014 and 2015 combined, the company earned a total of $890,000. Dividends of 50 cents per share in 2014 and $1.60 per share in 2015 were paid on the common stock.
Maria Martinez organized Manhattan Transport Company in January 2012. The corporation immediately issued at $8 per share one-half of its 200,000 authorized shares of $2 par value common stock. On January 2, 2013, the corporation sold at par value the entire 5,000 authorized shares of 8 percent, $100 par value cumulative preferred stock. On January 2, 2014, the company again needed capital and issued 5,000 shares of an authorized 10,000 shares of no-par cumulative preferred stock for a total of $512,000. The no-par shares have a stated dividend of $9 per share.
Explanation / Answer
A.
Statement showing computation of stockholders equity section of balance sheet:
Particulars
Amount($)
Amount($)
Authorized share: Common stock-200,000 shares at $2par value, Preference shares-10,000 shares at $100par value
Issued and outstanding:
Common stock-100,000 shares at $2par value
2,00,000
8% Preference shares-5,000 shares at $100par value (5000 shares x $100)
5,00,000
Additional paid-in capital
Common stock (100000 x ($8-$2))
6,00,000
Preference shares-No par value shares
5,12,000
Total paid-in capital
18,12,000
Retained earnings (Refer the note below)
6,40,000
Total stockholder equity
24,52,000
Working note:
The computation of retained earnings as on December 31, 2015 is as follows:
Particulars
Amount($)
Retained earnings as on December 31, 2013
1,70,000
Profit for the year 2014 and 2015
8,90,000
Less: dividend for preference stock-no par value shares.
(5000 shares x $9 x 2)
(90,000)
Less: dividend for preference stock
(5000 shares x $100 x 8% x 3years)
(1,20,000)
Less: dividend for common stock in 2014 (100000shares x 0.5)
(50,000)
Less: dividend for common stock in 2015
(100000 shares x $1.60)
(1,60,000)
Retained earnings as on December 31, 2015
6,40,000
B.
• If long term debt is taken interest cost would be $40,000 (500000 x 8%)
• But if preferred dividend is paid than it will cost $40,000 (5,000 shares of $100 par value at 8%)
• So, under both the circumstances cost will remain the same.
• Interest on borrowed loan is affixed charges while dividends is paid only depends upon the profit.
• Corporation paid the dividends only when cash is available with the corporations.
• It is not a fixed charge.
• Dividends in arrears are deducted from the stockholder equity to find the book value of shares.
• Debt has more serious impact compare to preferred stock.
• Debt has a fixed charges compared to dividends.
Particulars
Amount($)
Amount($)
Authorized share: Common stock-200,000 shares at $2par value, Preference shares-10,000 shares at $100par value
Issued and outstanding:
Common stock-100,000 shares at $2par value
2,00,000
8% Preference shares-5,000 shares at $100par value (5000 shares x $100)
5,00,000
Additional paid-in capital
Common stock (100000 x ($8-$2))
6,00,000
Preference shares-No par value shares
5,12,000
Total paid-in capital
18,12,000
Retained earnings (Refer the note below)
6,40,000
Total stockholder equity
24,52,000