Question

Balance Sheet (partial) Stockholders’ equity Paid-in capital Preferred stock, cumulative, 11,833 shares authorized, 7,100 shares issued and outstanding $ 710,000 Common stock, no par, 717,672 shares authorized, 555,000 shares issued 1,665,000 Total paid-in capital 2,375,000 Retained earnings 1,151,000 Total paid-in capital and retained earnings 3,526,000 Less: Treasury stock (7,000 common shares) 37,333 Total stockholders’ equity $3,488,667 From a review of the stockholders’ equity section, answer the following questions.
(a) How many shares of common stock are outstanding?
Common stock outstanding 543000 shares
(b) Assuming there is a stated value, what is the stated value of the common stock?
The stated value of the common stock $ per share
(c) What is the par value of the preferred stock?
The par value of the preferred stock $ per share
(d) If the annual dividend on preferred stock is $49,700, what is the dividend rate on preferred stock?
The dividend rate %
(e) If dividends of $71,400 were in arrears on preferred stock, what would be the balance reported for retained earnings?
The Retained Earnings balance $

Answer 1

Answer:

a) 548,000 shares

b) The stated value = $3 per common stock.

c) The par value of the preferred stock = $100

d) The dividend rate of preferred stock = 7%

e) Reported for retained earnings = $1,079,600

Explanation:

A. Number of outstanding common stock = Number of Common stock - Treasury stock

Given,

Number of Common stock issued = 555,000 shares

Treasury stock = 7,000 common shares

Treasury stock is the purchasing of the company's own stock from the market.

Therefore, Number of outstanding common stock = (555,000 - 7,000) shares

Number of outstanding common stock = 548,000 shares.

B.

The stock of the firm has no par value. It means the full amount is either in the premium or in stated value. Therefore, the firm's declared value of the common stock is the total common stockholders' equity divided by the total number of common stock issued.

Hence, the formula is,

The stated value = $\frac{total common stockholders' equity}{total number of issued common stock}$

The stated value = $\frac{1,665,000}{555,000}$

The stated value = $3 per common stock.

C.

We know,

The par value of the preferred stock = $\frac{Total preferred stock amount}{Number of preferred stock}$

Given,

Total preferred stockholders' equity = $710,000

Number of preferred stock = 7,100 shares

Putting the value in the formula,

The par value of the preferred stock = $\frac{710,000}{7,100}$

The par value of the preferred stock = $100

It is the selling price to the preferred stockholders for every preferred stock.

D.

Given,

The annual dividend = $49,700

Total preferred stockholders' equity = $710,000

We know, the dividend rate of preferred stock = $\frac{Annual Dividend paid to the preferred stockholders}{Total preferred stockholders' equity}$ x 100

Therefore,

The dividend rate of preferred stock = $\frac{49,700}{710,000}$ x 100

The dividend rate of preferred stock = 7%

This is a fixed rate and for this firm, it is cumulative. Therefore, the firm's preferred stockholders' will receive 7% dividend per year.

E.

Since the preferred stock of this firm is cumulative, therefore, the dividend has to be paid to the preferred stockholders if there are any outstanding amount remains in the previous year. Therefore, if there were $71,400 arrears of dividends, the firm would give those amounts from the retained earnings' balance.

Given,

Retained earnings                 = $1,151,000

Arrear preferred dividend     = $  (71,400)

The balance would be reported for retained earnings = $1,079,600