Book 1 - Chapter 29

18.

Most liquidations occur as the result of bankruptcy. In these situations, the stockholders usually
receive nothing or very little because creditors always have priority over all stockholders.
Therefore, the liquidation preference of preferred stock is worth nothing or very little.

19.

The cash received at the time of subscription is (100,000 × $12 × .4) = $480,000. The cash received
after the subscription is fully paid is 100,000 × $12 = $1,200,000. At the time of the subscription,
two accounts are credited, which increases paid-in capital. Common Stock Subscribed is credited
for the amount of (100,000 × $.10) = $10,000. Paid-in Capital in Excess of Par is credited for
$1,190,000. The debit balance of $720,000 in Subscriptions Receivable is shown as reduction in
total stockholders’ equity. When shares are fully paid, the Common Stock Subscribed amount
becomes reclassified as Common Stock, and the Subscriptions Receivable is eliminated.

When the balance of subscriptions is received:

Cash		720,000
	Subscriptions Receivable		720,000
Common Stock Subscribed		10,000
	Common Stock		10,000

20.

(1) The board of directors must declare the dividends. (2) The balance of retained earnings
must equal or exceed the amount of dividends declared. (3) There must be sufficient cash to
pay the dividend.

21.

Dilution is the decrease in existing stockholders’ percentage of total shares as the result of
additional shares of the same stock being issued to other stockholders. Note: Dilution also refers
to the decrease in earnings per share (see Learning Goal 31) as the result of additional shares
being issued.

29-1.

Springfield Corporation Balance Sheet (partial) December 31, 200X
Paid-in capital
Preferred stock, $50 par, 4%, 5,000 shares issued . . . . . . . . .		$ 250,000
Common stock, $.10 par, 100,000 shares issued . . . . . . . . . .	$ 10,000
Paid-in capital in excess of par, common . . . . . . . . . . . . . . . .	650,000	660,000
Total paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		910,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		985,000
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .

The annual preferred stock dividend is: 5,000 shares × $50 × .04 = $10,000

Learning Goal 29, continued

SOLUTIONS

Section VI · Corporations

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