Decision-Making Across the Organization The stockholders\' meeting for Percival
ID: 2432109 • Letter: D
Question
Decision-Making Across the Organization The stockholders' meeting for Percival Corporation has been in progress for some time. The chief financial officer for Percival is presently reviewing the company's financial statements and is explaining the items that comprise the stockholders' equity section of the balance sheet for the current year. The stockholders' equity section of Percival Corporation at December 31, 2017, is as follows. PERCIVAL CORPORATION Balance Sheet (partial) December 31, 2017 Paid-in capital Capital stock Preferred stock, authorized 1,000,000 shares cumulative, $100 par value, $8 per share, 6,000 shares issued and outstanding S 600,000 Common stock, authorized 5,000,000 shares, $1 par value, 3,000,000 shares issued, and 2,700,000 outstanding Total capital stock 3,000,000 3,600,000 Additional paid-in capital In excess of par-preferred stock In excess of par-common stock 50,000 25,000,000 25,050,000 28,650,000 900,000 29,550,000 9,300,000 $20,250,000 Total additional paid-in capital Total paid-in capital Total paid-in capital and retained earnings Total stockholders' equity Retained earnings Less: Treasury stock (300,000 common shares) At the meeting, stockholders have raised a number of questions regarding the stockholders' equity section. Instructions With the class divided into groups, answer the following questions as if you were the chief financial officer for Percival Corporation. What does the cumulative provision related to the preferred stock mean? "I thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share. How can that be? Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders' equity. Why is treasury stock not reported as an asset if it has a debit balance?"Explanation / Answer
(a) Cumulative provision related to the preferred stock means that the dividend on preferred stocks is payable irrespective of the company making profit or loss i.e. if the company suffers loss during a year then it will have to pay dividend next year in which case it will be making cumulative provision for the dividend payable.
(b) The books of the company is made on historical basis cost concept i.e. at which the amount was received from the shareholders at the time of issue of these shares. Moreover, the net worth of the equity shares is also reflected by retained earnings which is shown above. It is also a part of equity shareholders.
(c) The company is buy backing its common stock as it has 3,000,000 shares outstanding and company has sufficient retained earnings and the company may not want to share the ownership with so many shareholders i.e. why it is buybacking its shares.
Since Treasury Stock is a contra account which is made when shares are bought back to reflect the number of shares repurchased from the open market. Moreover, the actual share capital of the company after the buy back is the amount after subtracting the balance of the Treasury Stock Account. These shares have no right of dividend, not included in EPS calculation and no voting rights in the meeting of the company.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.