Answer:
Part A) Book Value = $1,080,000
Part B) Book Value = $1,050,000
Explanation:
Part 1: To compute the book value of the common stock at December 31, 2020
To do this, we consider both the preferred and common stock values as follows:
Stockholder's equity:
<u>Preferred Stock = $500,000</u>
<u>Common stock = $750,000</u>
Retained earnings: To calculate retained earnings we need to deduct dividends in arrears to prefered stock holders and then ascribe the remaining value to retained earnings.
Dividend in Arrears= 3 years @ 8% interest per year
= 500,000 x 0.08 x 3= $120,000
<u>Remaining earnings for available to common share holders </u>
= Retained earnings balance- dividend paid to prferred stock holders.
=$800,000 (net income for 2020)- $40,000 (net loss for 2019) - $260,000 (net loss for 2018)
= $800,000-$40,000-$260,000
= $500,000 - Dividend in arrears
= $500,000- $120,000
= $380,000
<u>Book Value of Stockholders' equity</u>
Common Stock equity + Balance of retained earnings
= $700,000 + $380,000
= $1,080,000
The book value per share = $1,080,000/ outstanding shares
= $1,080,000/750,000= $1.44
Part 2: To compute the book value of the common stock at December 31, 2020 Preference stock has liquidating value of $106 per share
Stockholder's equity:
<u>Preferred Stock = $500,000</u>
Preferred stock liquidating premium = (106-100) x 5000
= $6 x 5000= $30,000
<u>Common stock = $750,000</u>
Retained earnings: To calculate retained earnings we need to deduct dividends in arrears to prefered stock holders and then ascribe the remaining value to retained earnings.
Dividend in Arrears= 3 years @ 8% interest per year
= 500,000 x 0.08 x 3= $120,000
<u>Remaining earnings for available to common share holders </u>
= Retained earnings balance- net losses from previous years - dividend paid to prferred stock holders - liquadating premium to preferred stock
=$800,000 (net income for 2020)- $40,000 (net loss for 2019) - $260,000 (net loss for 2018)
= $800,000-$40,000-$260,000
= $500,000 - Dividend in arrears - liquidating
= $500,000- $120,000- $30,000
= $350,000
<u>Book Value of Stockholders' equity</u>
Common Stock equity + Balance of retained earnings
= $700,000 + $350,000
= $1,050,000
The book value per share = $1,080,000/ outstanding shares
= $1,050,000/750,000= $1.4
