Book 1 - Chapter 29

10.

Preferred Stock		300,000
Paid-in Capital in Excess of Par, Preferred		8,000
	Common Stock		12,000
	Paid-in Capital in Excess of Par, Common		296,000

Check the total: ($924,000 × 4,000 / 12,000) = $308,000 total preferred stock equity converted into
common stock equity. There is no gain or loss and total stockholders’ equity does not change.

11.

Date of declaration: The date the board of directors approves a dividend. The dividend becomes a liability on this date.
Date of record: The date by which stock ownership must be officially recorded for the owner to receive a dividend.
Ex-dividend date: The date before which a stock must be purchased in order to allow enough time for the buyer’s name to be officially recorded to receive a dividend; generally, two days before the date of record.
Payment date: The date that checks are recorded to owners as of the date of record.
Journal entries are needed on the declaration date to record the liability and to decrease retained earnings, and on the payment date to record the payment.

12.

Cumulative: A feature of preferred stock that requires that preferred dividends in arrears plus current preferred dividends be paid before common stockholders can receive a dividend.
Callable: A feature that allows the issuing corporation to purchase shares of stock at a fixed price from the owners.
Convertible: A feature that permits owners of preferred stock to convert preferred shares into common shares.

13.

The procedure is for the board of directors to use the most reliable value. When stock is regularly
traded on a public stock exchange, this is usually the most reliable value. If the stock is not publicly
traded and the asset has a reliably determined market value, such as a normal invoice price, then
the asset value is used. If neither value is available, the board of directors can assign a value to the
transaction.

14.

a.	Usually non-voting: preferred
b.	Dividends with the greatest variability: common
c.	Can be callable: preferred
d.	Usually receives assets before other classes of stock in liquidation: preferred
e.	Will be the most profitable if the business is very profitable: common
f.	Can be convertible: preferred
g.	Often has a claim on unpaid dividends from previous years: preferred

15.

Market value. Buyers and sellers determine value. Par value has no relationship to the true value of
a stock.

16.

2006: $0
2007: Preferred, (10,000 × $100 × .06 × 2) = $120,000; common, $125,000 – $120,000 = $5,000
2008: Preferred, (10,000 × $100 × .06) = $60,000; common, $150,000 – $60,000 = $90,000
Note: The preferred stock is cumulative, so two years of dividends is paid on preferred stock in 2007.

17.

When stock is issued, legal capital imposes a minimum portion of the value received that must be
permanently retained by a corporation. After a corporation begins to operate, additional state
laws called “capital maintenance requirements” create restrictions on the amount of assets that
can be distributed to stockholders.

Learning Goal 29, continued

SOLUTIONS

Learning Goal 29: The Owners’ Equity of a Corporation

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