Question 1: The stockholders’ meeting for Strauder Corporation has been in progress for some time. The chief financial officer for Strauder is presently reviewing the company’s financial statements and is explaining the items that comprise the stockholders’ equity section of the balance sheet for the current year. stockholders’ equity section of Strauder The corporation on December 31, 2010, is as follows. STRAUDER CORPORATION Balance Sheet (partial) December 31, 2010 Paid-in capital Capital stock Preferred stock, authorized 1,000,000 shares cumulative, $100 par value, $8 per share, 6,000 shares issued and outstanding 600,000 Common stock, authorized 5,000,000 shares, $1 par value, 3,000,000 shares issued, and 2,700,000 outstanding 3,000,000 Total capital stock 3,600,000 Additional paid-in capital In excess of par value—preferred stock 50,000 In excess of par value—common stock 25,000,000 Total additional paid-in capital 25,050,000 Total paid-in capital 28,650,000 Retained earnings 900,000 Total paid-in capital and retained earnings 29,550,000 Less: Common treasury stock (300,000 shares) 9,300,000 Total stockholders’ equity 20,250,000 At the meeting, stockholders have raised a number of questions regarding the stockholders’ equity section. Instructions If you were the chief financial officer for Strauder Corporation. (a) “What does the cumulative provision related to the preferred stock mean?” (b) “I thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share. How can that be?” (c) “Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders’ equity. Why is treasury stock not reported as an asset if it has a debit balance?”
Question 1:
The stockholders’ meeting for Strauder Corporation has been in progress for some time. The chief financial officer for
Strauder is presently reviewing the company’s financial statements and is explaining the items that comprise the
The corporation on December 31, 2010, is as follows.
STRAUDER CORPORATION
Balance Sheet (partial)
December 31, 2010
Paid-in capital
Capital stock
cumulative, $100 par value, $8 per share, 6,000
shares issued and outstanding 600,000
Common stock, authorized 5,000,000 shares, $1 par
value, 3,000,000 shares issued, and 2,700,000
outstanding 3,000,000
Total capital stock 3,600,000
Additional paid-in capital
In excess of par value—preferred stock 50,000
In excess of par value—common stock 25,000,000
Total additional paid-in capital 25,050,000
Total paid-in capital 28,650,000
Total paid-in capital and retained earnings 29,550,000
Less: Common
Total stockholders’ equity 20,250,000
At the meeting, stockholders have raised a number of questions regarding the stockholders’ equity section.
Instructions
If you were the chief financial officer for Strauder Corporation.
(a) “What does the cumulative provision related to the preferred stock mean?”
(b) “I thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share.
How can that be?”
(c) “Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because
it is subtracted from stockholders’ equity. Why is treasury stock not reported as an asset if it has a debit balance?”
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