Question

Exercise 15-8

Otis Thorpe Corporation has 10,000 shares of $100 par value, 8% preferred stock and 50,000 shares of $10 par value common stock outstanding at December 31, 2014.

Answer the questions in each of the following independent situations.

(a) If the preferred stock is cumulative and dividends were last paid on the preferred stock on December 31, 2011, what are the dividends in arrears that should be reported on the December 31, 2014, balance sheet?

The dividends in arrears to be reported on the December 31, 2014​ = _______________

(b) If the preferred stock is convertible into 7 shares of $10 par value common stock and 4,000 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value? (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

c) If the preferred stock was issued at $107 per share, how should the preferred stock be reported in the stockholders’ equity section? (Enter account name only and do not provide descriptive information.)

Answer 1

Dividends will be paid on the Bookvalue of Preferred Stock.

Bookvalue of Preferred Stock = 10,000 shares * $100 = $10,00,000

Dividend per year @ 8% on above = $10,00,000 * 8% = $80,000.

a).

Given that, Dividend for last 3 years is due (31-12-2011 to 31-12-2014)

And also stated that, the given Preferred Stock is "Cumulative"

So, Dividends for 3 years = $80,000 * 3 years = $2,40,000.

The dividends in arrears to be reported on the December 31, 2014 = $2,40,000

b).

8% Preferred Stock A/c Dr. (4,000 shares * $100)                      4,00,000

To Common Stock A/c (4,000*7 shares*$10)                                          2,80,000

To Paid in Capital in excess of par value                                                  1,20,000

(Being 4,000 shares of Preferred stock has been converted in to Common Stock)

c).

Bank A/c Dr. (10,000 shares * $107)                                                 10,70,000

To 8% Preferred Stock A/c (10,000 shares * $100)                                 10,00,000

To Paid in Capital in excess of par A/c (10,000 shares * $7)                    70,000

(Being 10,000 shares of Preferred stock has been issued at $107 per share)

In stockholders’ equity section, there is an increase of $70,000 due to SharePremium (or) Security Premium (or) Paid in Capital in excess of par value.