Stockholders Equity in a Balance Sheet
Maria Martinez organized Manhattan Transport Company in January 2008. 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, 2009, the corporation sold at par value the entire 5,000 authorized shares of 8 percent, $100 par value cumulative preferred stock. On January 2, 2010, 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 $512,000. The no-par shares have a stated dividend of $9 per share.
The company declared no dividends in 2008 and 2009. At the end of 2009, its retained earnings were $170,000. During 2010 and 2011 combined, the company earned a total of $890,000. Dividends of 50 cents per share in 2010 and $1.60 per share in 2011 were paid on the common stock.
a. Prepare the stockholders equity section of the balance sheet at December 31,2011. Include a supporting schedule showing your computation of retained earnings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)
b. Assume that on January 2,2009, the corporation could have borrowed $500,000 at 8 percent interest on a long-term basis instead of issuing the 5,000 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.
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