On December 31, 2011, the stockholders’ equity section of Sophia Company’s balance sheet appeared as follows:
Common stock, $8 par value, 400,000 shares authorized,
120,000 shares issued and outstanding ......... $ 960,000
Additional paid-in capital ............... 2,560,000
Total contributed capital ................ $3,520,000
Retained earnings ................. 1,648,000
Total stockholders’ equity ............... $5,168,000
The following are selected transactions involving stockholders’ equity in 2012:
Jan. 4 The board of directors obtained authorization for 40,000 shares of $40 par value noncumulative preferred stock that carried an indicated dividend rate of $4 per share and was callable at $42 per share.
14 The company sold 24,000 shares of the preferred stock at $40 per share and issued another 4,000 in exchange for a building valued at $160,000.
Mar. 8 The board of directors declared a 2-for-1 stock split on the common stock.
Apr. 20 After the stock split, the company purchased 6,000 shares of common stock for the treasury at an average price of $12 per share.
May 4 The company sold 2,000 of the shares purchased on April 20, at an average price of $16 per share.
July 15 The board of directors declared a cash dividend of $4 per share on the preferred stock and $0.40 per share on the common stock.
July 25 Date of record.
Aug. 15 Paid the cash dividend.
Nov. 28 The board of directors declared a 15 percent stock dividend when the common stock was selling for $20 per share to be distributed on January 5 to stockholders of record on December 15.
Dec. 15 Date of record for the stock dividend.
1. Prepare the journal entries to record the transactions.
2. Prepare the stockholders’ equity section of the company’s balance sheet as of December 31, 2012. Net loss for 2012 was $436,000.
3. Compute the book value per share for preferred and common stock (including common stock distributable) on December 31, 2011 and 2012, using end-of-year shares outstanding. What effect would you expect the change in book value to have on the market price per share of the company’s stock?