Chapter 11, Problem 5E

Determining the Effects of the Issuance of Common and Preferred Stock

Inside Incorporated was issued a charter on January 15 authorizing the following capital stock:

Common stock, $6 par, 100,000 shares, one vote per share.

Preferred stock, 7 percent, par value $10 per share, 5,000 shares, nonvoting.

The following selected transactions were completed during the first year of operations in the order given:

1. a. Issued 20,000 shares of the $6 par common stock at $18 cash per share.
2. b. Issued 3,000 shares of preferred stock at $22 cash per share.
3. c. At the end of the year, the accounts showed net income of $38,000.

Required:

1. 1. Prepare the stockholders’ equity section of the balance sheet at December 31.
2. 2. Assume that you are a common stockholder of Inside Incorporated. If the company needed additional capital, would you prefer to have it issue additional common stock or additional preferred stock? Explain.