Joy Sun organized Ray Beam, Inc., in January 2008. The corporation immediately issued at $15per share one-half of its 260,000 authorized shares of $1 par value common stock. On January 2,2009, the corporation sold at par value the entire 10,000 authorized shares of 10 percent, $100par value cumulative preferred stock. On January 2, 2010, the company again needed money andissued 5,000 shares of an authorized 8,000 shares of no-par cumulative preferred stock for a totalof $320,000. The no-par shares have a stated dividend of $6 per share. The company declared no dividends in 2008 and 2009. At the end of 2009, its retained earn-ings were $530,000. During 2010 and 2011 combined, the company earned a total of $1,400,000. Dividends of 90 cents per share in 2010 and $2 per share in 2011 were paid on the common stock.Instructionsa. Prepare the stockholders’ equity section of the balance sheet at December 31, 2011. Include asupporting schedule showing your computation of retained earnings at the balance sheet date.(Hint: Income increases retained earnings, whereas dividends and net losses decrease retainedearnings.)b. Assume that on January 2, 2009, the corporation could have borrowed $1,000,000 at 10 percent interest on a long-term basis instead of issuing the 10,000 shares of the $100 par value cumu-lative preferred stock. Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operations with long-term debt.
Joy Sun organized Ray Beam, Inc., in January 2008. The corporation immediately issued at $15
per share one-half of its 260,000 authorized shares of $1 par value common stock. On January 2,
2009, the corporation sold at par value the entire 10,000 authorized shares of 10 percent, $100
par value cumulative
issued 5,000 shares of an authorized 8,000 shares of no-par cumulative preferred stock for a total
of $320,000. The no-par shares have a stated dividend of $6 per share.
The company declared no dividends in 2008 and 2009. At the end of 2009, its retained earn-
ings were $530,000. During 2010 and 2011 combined, the company earned a total of $1,400,000.
Dividends of 90 cents per share in 2010 and $2 per share in 2011 were paid on the common stock.
Instructions
a. Prepare the
supporting schedule showing your computation of
(Hint: Income increases retained earnings, whereas dividends and net losses decrease retained
earnings.)
b. Assume that on January 2, 2009, the corporation could have borrowed $1,000,000 at 10 percent
interest on a long-term basis instead of issuing the 10,000 shares of the $100 par value cumu-
lative 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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