Exercise 8-5 Characteristics of capital stock LO 8-2 The stockholders’ equity se
ID: 2413926 • Letter: E
Question
Exercise 8-5 Characteristics of capital stock LO 8-2 The stockholders’ equity section of Creighton Company’s balance sheet is shown as follows. CREIGHTON COMPANY As of December 31, 2018 Stockholders’ equity Preferred stock, $10 stated value, 7% cumulative, 300 shares authorized, 50 issued and outstanding $ 500 Common stock, $10 par value, 250 shares authorized, 100 issued and outstanding 1,000 Common stock, class B, $20 par value, 400 shares authorized, 150 issued and outstanding 3,000 Common stock, no par, 150 shares authorized, 100 issued and outstanding 2,200 Paid-in capital in excess of stated value—preferred 600 Paid-in capital in excess of par value—common 1,200 Paid-in capital in excess of par value—class B common 750 Retained earnings 7,000 Total stockholders’ equity $ 16,250 Required Assuming the preferred stock was originally issued for cash, determine the amount of cash that was collected when the stock was issued. Based on the class B common stock alone, determine the amount of the company’s legal capital. Based on the class B common stock alone, determine the minimum amount of assets that must be retained in the company as protection for creditors. Determine the number of shares of class B common stock that are available to sell as of December 31, 2018. Assuming Creighton purchases treasury stock consisting of 25 shares of its no par common stock on January 1, 2019, determine the amount of the no-par common stock that would be outstanding immediately after the purchase. Based on the stockholders’ equity section shown above, can you determine the market value of the preferred stock? rev: 03_06_2018_QC_CS-120790
Explanation / Answer
Calculation for determining amount of Cash received when preferred Stock was issued:
Number of Stockholder's 7% Equity Preferred Stock authourised= 300
Number of Stockholder's 7% Equity Preferred Stock issued= 50
Stated Value or Par Value of 7% Equity Preferred Stock= $10
Amount of cash Collected when 7% Equity Preferred Stock was issued(assumed all in cash)= Number of 7% Equity Preferred Stock issued* Stated Value= 50* $10= $500.
Calculation for determining Company's Legal Capital(based on Class B Common Stock):
Par Value of Total Common Stock Class B:
Par Value of each Common Stock Class B= $20
Number of Share's Issued= 150
Total Par Value of Common Stock Class B= Number of Share's Issued*Par Value of each Common Stock Class B
= 150*$20= $3000
Legal Capital of Company = Total Par Value Of Common Stock( Only Class B )+ Stated Value of Preferred Stock
= $3000+ $500 =$3500
Determination of minimum amount of Asset that must be retained in the Company as protection for Creditors(based on Class B Common Stock):
Total stated value of Preferred Stock= $500
Paid in Capital in excess of stated Value= $2200
Total Par Value of Common Stock(Class B)= $3000
Paid in Capital in excess of Par Value= $1200
Minimum amount of Asset that must be retained in the Company as protection for Creditors(based on Class B Common Stock): $500+ $2200 + $3000+ $1200 = $6900.
Number of shares of Class B Common Stock that are available to sell as of December 31,2018:
Number of Share's Authorized = 400
Number of Share's Issued = 150
Remaining Number of share's available to sell as on December 31, 2018= 400-150= 250 shares.
Determination of Amount of no- Par Common Stock outstanding immediately after purchase of 25 Treasury stock :
Number of no-Par Common Stock issued initially = 100
Number of no-Par Common Stock redeemeded or purchased back = 25
Number of no- Par Common Stock remaining = 100-25= 75
Amount of no- Par Common Stock outstanding after purchase
= $2200/100*75= $1650.
Market Value of Preferred Stock:
Dividend Rate of Preferred Stock =7%
Stated Value Or Par Value =$10
Dividend Amount =$10*7% = $0.7
Assumed Required Rate of Return as 12%
Market Value of Preferred Stock = $0.7/.12 =$5.833
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