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11.4 A -
Early in the year bill Barnes and several friends organized a corp known as Barnes communiations, inc. The corporation was authorized to issue 50,000 shares of $100 Par value, 10% cumulative preferred stock, and 400,000 shares of $2 par value common stock. the following transactions (among others) occurred during the year:
Jan. 6 - Issued for ash 20,000 shares of common stock at $14 per share. These shares were issue to Barnes and 10 other investors.
Jan 7. - Issued an additional 500 shares of common stock to Barnes in exchange for his services in organizing the company. The stockholders agreed that these services were worth $7,000.
Jan. 12 Issued 2,500 shares of preferred stock for cash of $250,000
June 4 - Acquired land as a building site in exchange for 15,000 shares of common stock. In view of the appraised value of the land and the progress of the company, the directors agreed that the common stock was to be valued for purposes of this transaction at $15 per share.
Nov 15 - The first annual dividend of $10 per share was declared on the preferred stock to be paid Dec. 20
Dec. 20 - Paid the cash dividend declared on Nov 15
Dec 31 - After the revenue and the expenses were closed into the income summary account, that account indicated a net income of $147,200.
Instructions:
1. Prepared journal entries in general ledger form to record the above transactions. Includes entried at dec 31 to close the income summary account and the divdends account.
2. Prepare the stockholders equity section of the Barnes communications Inc. balance sheet at Dec. 31.
11.6A
Parson, Inc. is a publicly owned company. the following info is excerpted from a recent balance sheet. Dollar amounts (except per share amounts are stated in thousands)
Stockholder's Equity:
Convertible $17.20 perferred stock, $250 par value, 1,000,000 shares authorized;345,000 shares issued and outstanding...... $86,250
Common stock, par value $.50,25,000,000 shares authorized...... $6,819
Additional paid in capital...... 87,260
Retained earnings...... 57,263
Total Stockholder's equity...... $237,592
Instructions:
a. How many shares of common stock have been issued?
b. What is the total amuont of the annual dividends paid to preferrred stockholders?
c. What is the total amount of paid in capital?
d. What is the book value per share of common stock?
e. Briefly explain the advantages and disadvantages to Parsons of being publicly ownened rather than being privately owned.
f. What is meant by the term convertible used in the the preferred stock?
g. Assume that preferred stock is selling at $248 per share. does this provide a higher or lower dividend yield than 8%, $50 par value preferrred with a market price of $57 per share. Show computations and explain why one preferred stock might yield less than another.
P11-4A)
a.General Journal
20__
Jan / 6 / Cash / 280,000
Common Stock / 40,000
Additional Paid-in Capital: Common Stock / 240,000
Issued 20,000 shares of $2 par value common stock
at $14 per share.
7 / Organization Costs Expense / 7,000
Common Stock / 1,000
Additional Paid-in Capital: Common Stock / 6,000
Issued 500 shares of common stock to Barnes in
exchange for services relating to formation of the
corporation. Implied issuance price ($7,000 ÷ 500
shares) = $14 per share.
12 / Cash / 250,000
10% Cumulative Preferred Stock / 250,000
Issued 2,500 shares of $100 par value, 10%,
cumulative preferred stock at par value.
June / 4 / Land / 225,000
Common Stock / 30,000
Additional Paid-in Capital: Common Stock / 195,000
Issued 15,000 shares of common stock in exchange
for land valued at $225,000 (15,000 shares x $15).
Nov / 15 / Dividends (Preferred Stock) / 25,000
Dividends Payable / 25,000
To record declaration of annual dividends of $10
per share on 2,500 preferred shares outstanding.
Payable Dec. 20.
Dec / 20 / Dividends Payable / 25,000
Cash / 25,000
To record payment of dividend declared Nov. 15.
31 / Income Summary
Retained Earnings / 147,200
To close the Income Summary account for the / 147,200
year.
31 / Retained Earnings / 25,000
Dividends / 25,000
To close the Dividends account.
b.
BARNES COMMUNICATIONS, INC.
Partial Balance Sheet
December 31, 20___
Stockholders' equity
10% cumulative preferred stock, $100 par, authorized
50,000 shares, issued and outstanding 2,500 shares / $ 250,000
Common stock, $2 par, authorized 400,000 shares,
issued and outstanding 35,500 shares / 71,000
Additional paid-in capital: Common stock / 441,000
Total paid-in capital / $ 762,000
Retained earnings* / 122,200
Total stockholders' equity / $ 884,200
*Computation of retained earnings at December 31, 20__:
Retained earnings at January 1, 20__ / $ -
Add: Net income in 20__ / 147,200
Less: Preferred dividends in 20__ / (25,000)
Retained earnings at December 31, 20__. / $ 122,200
P11-6A)
In Thousands(Except for Per
Share Amounts)
a. / Par value of all common stock outstanding / $ 6,819
Par value per share / 0.50
Number of shares outstanding ($6,819/$0.50) / 13,638
b. / Dividend requirement per share of preferred stock / $ 17.20
Numbers of shares of preferred stock outstanding / 345
Annual dividends paid to preferred stockholders ($17.20 x 345) / $ 5,934
c. / Par value of preferred stock / $ 86,250
Par value of common stock / 6,819
Additional paid-in capital / 87,260
Total paid-in capital / $ 180,329
d. / Total stockholders’ equity / $ 237,592
Less: Preferred stock par value = ($250 x 345 shares) / 86,250
Equity of common stockholders / $ 151,342
Number of shares of common stock outstanding / 13,638
Book value per share ($151,342/13,638 shares) / $ 11.10
e. / The basic advantage of being publicly owned is that the corporation has the opportunity to raise large amounts of equity capital from many investors. Some publicly owned corporations have millions of stockholders, including pension funds, mutual funds, and other corporations. Closely held corporations are usually unable to raise the large amounts of capital available to publicly owned corporations.
A major advantage to the stockholders of a publicly owned corporation is that their
equity investments are highly liquid assets, immediately salable at quoted market
prices.
The primary disadvantages of being publicly owned are the increased governmental regulations and financial reporting requirements.
f. / The term convertible means that at the option of the preferred stockholder, each preferred share can be converted into a specified number of common shares. To evaluate the value of this conversion feature, the stockholder must know into how many shares of common each preferred share can be converted. This information is disclosed in the notes accompanying the corporation’s financial statements.
g. / At $248 per share, Parson’s preferred has a dividend yield of 6.9% ($17.20 ¸ $248). In comparison, an 8%, $50 par preferred selling at $57 has a dividend yield of 7% [(8% ´ $50 par) ¸ $57].
The dividend yield on preferred stock indicates how much investors value certain
features of the stock. The lower the yield, the more investors favor the stock. A
higher yield means that investors demand a higher return to induce them to purchase
the stock.
The two principal factors that cause one preferred to yield less than another are: (1) the appearance of greater ability to pay the preferred dividends each year, and (2) special features that appeal to investors, such as Parson’s conversion feature, cumulative dividends, or a high call price.