Lambert Corporation issued 1,000 shares of $100 par value, 8 percent, cumulative
ID: 2742718 • Letter: L
Question
Lambert Corporation issued 1,000 shares of $100 par value, 8 percent, cumulative, nonparticipating preferred stock for $100 each. The stock is preferred to assets, redeemable after five years at a prespecified price, and the preferred shareholders do not vote at the annual shareholders' meeting. The condensed balance sheet of Lambert prior to the insurance follows: Assets - $580,000, Total assets - $580,000, Liabilities - $250,000, Shareholders' equity - $330,000, Total liabilities and shareholders' equity - $580,000. Lambert has entered into a debt agreement that requires the company to maintain a debt/equity ratio of less than 1:1. A. Provide the journal entry to record the preferred stock issuance, and compute the resulting debt/equity ratio, assuming that the preferred stock is considered an equity security. B. Compute the debt/equity ratio, assuming that the preferred stock is considered a debt security. C. What incentives might the management of Lambert have to classify the issuance as equity instead of debt? Do you think that the issuance should be classified as debt oor equity? What might Lambert's external auditors think?
Explanation / Answer
A.)
B.
C.) An instrument is considered as equity if it has voting right's and they got to have say in the decision making of the company. They are considered as part of the owners of the company they don't have fixed return's as debentures or loan's, they are paid after paying all the debt's of the company and it is not obligatory on the company to declare dividend's to them on the shareholder's. For any decision making shareholder's consent is required. Issuance should be classified as debt as it has to be paid 8% on preference shares no matter company earn's a profit or a loss. Lambert external auditor may have different feeling or they might rectify the company as prefernce shares are not considered as a part of equity. or they might be indifferent.
Cash A/c Dr. $100000 To 8% Preference shares A/c $100000 (Being preference shares issued 1000 each @100) 8% preference shares A/c Dr. $100000 To Preference share capital a/c $100000 (Being preference shares issued now transferred to preference shares Capital)Related Questions
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