Question

(6) Why does the company have preferred stock outstanding? (7) Based on information provided in PepsiCo's Consolidated Statement of Equity (Exhibit 5), its preferred stock account was affected by three separate events during 2018, including the redemption, conversion, and retirement. Please complete the following journal entries made by PepsiCo to record these events. (Hint: The account of "Repurchased Preferred Stock" is essentially the account of "Treasury stock" we cover in class.) (i Repurchased Preferred Stock (a) Cash (a) (ii) Preferred Stock (b) Common Stock at par 0 million (d) (c) (iii) Preferred Stock (e) (f) Repurchased Preferred Stock (g) (h)

Answer 1

(6) Companies have preferred stock outstanding to achieve a required debt-equity ratio. As it increases the equity component in the ratio.

It is a better option than debentures or bonds in a way if the company is facing any financial difficulties then it can postpone its dividend payment. However interest on debentures or bonds can not be postponed.

Also, even a company has huge amount of debt in its capital structure then the credit rating agencies can downgrade its ratings.

Also too much debt creates a tension amongst the shareholders and investors are apprhensive of their investments.

(7)

($ in million)

Journal Entry

S.No.	Particulars	Amount	Amount
1	Repurchased Preferred Stock	2
	Cash		2
2	Preferred Stock	6
	Common Stock at par		0
	Common Stock in excess of par value		6
3	Preferred Stock	35
	Retained Earnings	164
	Repurchased Preferred Stock		199