Answer:
(a) Cumulative dividend is not reported in Balance sheet.
The dividends in arrears on December 31, 2014 is $240,000
(b) Preferred Stock (Dr.) $400,000
Common Stock (Cr.) $280,000
Paid in capital Excess of par (Cr.) $120,000.
(c) Cash (Dr.) $1,070,000
Preferred Stock (Cr.) $1,000,000
Paid in capital (Cr.) $70,000
Explanation:
a. Cumulative dividends on Preferred stocks are not declared and therefore they are not reported in Balance sheet of a company.
To calculate the dividends in arrears on December 31, 2014,
10,000 shares * $100 par value * 8% preferred stock. * 3 years arrears.
= $240,000.
b. Preferred stock conversion into common stock is recorded as common stock account in balance sheet.
Preferred stock conversion amount is 4,000 shares * $100 par value = $400,000. This is presented as debit entry.
The credit entry will be common stock account with $ 280,000 (4,000 * 7 shares conversion * $10 par value).
The difference in both entries will be recorded as paid in capital as credit.
c. When preferred stock is issued cash is increased so debit account will be cash (10,000 shares * $107 per share) and credit entry will be Preferred Stock account in balance sheet at par value (10,000 shares * $100 par value). The remaining is credited in paid in capital of preferred stock account [10,000 shares * $7 ($107 - $100) per share].
