Early in 2014, Jones Industries was formed with authorization to issue 125,000 s

Question

Early in 2014, Jones Industries was formed with authorization to issue 125,000 shares of $20 par value common stock and 15,000 shares of $100 par value cumulative preferred stock. During 2014, all the preferred stock was issued at par, and 90,000 shares of common stock were sold for $35 per share. The preferred stock is entitled to a dividend equal to 5 percent of its par value before any dividends are paid on the common stock. During its first five years of business (2014 through 2018), the company earned income totaling $3,850,000 and paid dividends of 55 cents per share each year on the common stock outstanding. On January 2, 2016, the company purchased 2,000 shares of its own common stock in the open market for $80,000. On January 2, 2018, it reissued 1,200 shares of this treasury stock for $60,000. The remaining 800 shares were still held in treasury at December 31, 2018. Required:

1. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018. Include a supporting schedule showing (1) your computation of any paid-in capital on treasury stock and (2) retained earnings at the balance sheet date. (Hint: Dividends are not paid on shares of stock held in treasury).

2. As of December 31, 2018, compute the company’s book value per share of common stock.

3. At December 31, 2018, shares of the company’s common stock were trading at $48. Explain what would have happened to the market price per share had the company split its stock 2-for-1 at this date. Also explain would have happened to the par value of the common stock and to the number of common shares outstanding.

1. Distinguish between paid-in capital and retained earnings of a corporation. Why is such a distinction useful? What are the major transactions and other financial activities that impact the amount of paid-in capital of a corporation? Identify for each major type of transaction or activity whether it increases or decreases the amount of paid-in-capital.

2. Describe the usual nature of the following features as the apply to a share of preferred stock: a. Cumulative b. Convertible

3. What is the purpose of a stock split?

4. What is treasury stock? Why do corporations purchase their own shares? Is treasury stock an asset? How should it be reported in the balance sheet?

Explanation / Answer

Note: The other questions are not part of this question, hence these should be submitted separately.

1. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018. Include a supporting schedule showing (1) your computation of any paid-in capital on treasury stock and (2) retained earnings at the balance sheet date. Year Share Capital Reatained Earnings Preferred stock Common stock Tresury Stock Number of shares Amount Dividend Paid Number of shares Face Value Paid in capital in excess of par Dividend Paid Number of shares Amount Income earned in Five years 3850000 2014 15000 1500000 75000 90000 1800000 1350000 49500 -124500 2015 75000 49500 -124500 2016 75000 88000 1760000 48400 2000 80000 -123400 2017 75000 48400 -123400 2018 75000 89200 1784000 12000 49060 800 32000 -124060 Balance 15000 1500000 89200 1784000 1362000 800 32000 3230140

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