Johnstone Inc. began operations in January 2014 and reported the following results for each of its 3 years of operations.
2018............................$260,000 net loss
2019..............................$40,000 net loss
2020........................$700,000 net income
At December 31, 2020, Johnstone Inc. share capital accounts were as follows.
Share Capital-Preference, 6% cumulative, par value $100; authorized, issued, and outstanding 5,000 shares..............................................$500,000
Share Capital-Ordinary, par value $1.00; authorized 1,000,000 shares; issued and outstanding 750,000 shares..........................................$750,000
Johnstone Inc. has never paid a cash or share dividend. There has been no change in the share capital accounts since Johnstone began operations. The country law permits dividends only from retained earnings.
Instructions
a. Compute the book value of the ordinary shares at December 31, 2020.
b. Compute the book value of the ordinary shares at December 31, 2020, assuming that the preference shares have a liquidating value of $106 per share.