Joy Sun organized Ray Beam, Inc., in January 2008. The corporation immediately issued at $15 per share one-half of its 260,000 authorized shares of $1 par value common stock. On January 2, 2009, the corporation sold at par value the entire 10,000 authorized shares of 10 percent, $100 par value cumulative preferred stock. On January 2, 2010, the company again needed money and issued 5,000 shares of an authorized 8,000 shares of no-par cumulative preferred stock for a total of $320,000. The no-par shares have a stated dividend of $6 per share.
The company declared no dividends in 2008 and 2009. At the end of 2009, its retained earnings were $530,000. During 2010 and 2011 combined, the company earned a total of $1,400,000.
Dividends of 90 cents per share in 2010 and $2 per share in 2011 were paid on the common stock.
a. Prepare the stockholders’ equity section of the balance sheet at December 31, 2011. Include a supporting schedule showing your computation of retained earnings at the balance sheet date.
b. Assume that on January 2, 2009, the corporation could have borrowed $1,000,000 at 10 percent interest on a long-term basis instead of issuing the 10,000 shares of the $100 par value cumulative preferred stock. Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operations with long-term debt.