Early in 2007, Parker Industries was formed with authorization to issue 100,000 shares of $20 par value

Question:

Early in 2007, Parker Industries was formed with authorization to issue 100,000 shares of $20 par value common stock and 10,000 shares of $100 par value cumulative preferred stock. During 2007, all the preferred stock was issued at par, and 80,000 shares of common stock were sold for $35 per share. The preferred stock is entitled to a dividend equal to 6 percent of its par value before any dividends are paid on the common stock.

During its first five years of business (2007 through 2011), the company earned income totaling $3,800,000 and paid dividends of 60 cents per share each year on the common stock outstanding.

On January 2, 2009, the company purchased 1,000 shares of its own common stock in the open market for $40,000. On January 2, 2011, it reissued 600 shares of this treasury stock for $30,000.

The remaining 400 shares were still held in treasury at December 31, 2011.

Instructions

a. Prepare the stockholders’ equity section of the balance sheet at December 31, 2011. Include a supporting schedule showing

(1) Your computation of any paid-in capital on treasury stock and

(2) Retained earnings at the balance sheet date.

b. As of December 31, 2011, compute the company’s book value per share of common stock.

c. At December 31, 2011, shares of the company’s common stock were trading at $56. Explain what would have happened to the market price per share had the company split its stock 2-for-1 at this date. Also explain what would have happened to the par value of the common stock and to the number of common shares outstanding.


Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...
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Financial and Managerial Accounting the basis for business decisions

ISBN: 978-0078111044

16th edition

Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello

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