Southern Exposure Ltd. begins operations on January 2, 2016. During the year, the following transactions affect shareholders’ equity:
1. Southern Exposure’s articles of incorporation authorize the issuance of 1 million common shares, and the issuance of 100,000 preferred shares, which pay an annual dividend of $2 per share.
2. A total of 240,000 common shares are issued for $5 a share.
3. A total of 15,000 preferred shares are issued for $14 per share.
4. The full annual dividend on the preferred shares is declared.
5. The dividend on the preferred shares is paid.
6. A dividend of $0.10 per share is declared on the common shares but is not yet paid.
7. The company has net income of $150,000 for the year. (Assume sales of $750,000 and total operating expenses of $600,000.)
8. The dividends on the common shares are paid.
9. The closing entry for the dividends declared accounts is prepared.
a. Prepare journal entries to record the above transactions, including the closing entries for net income and dividends declared mentioned in items 3 through 6 above.
b. Prepare the shareholders’ equity section of the statement of financial position as at December 31, 2016.
c. Why would an investor choose to purchase the common shares rather than the preferred shares? Or vice versa?